Following the European Central Bank’s monetary policy meeting yesterday, Mario Draghi, the ECB President, was downbeat about the prospects for an upturn in growth in the region in the coming months. This was not an unexpected statement but it confirmed that it is becoming more likely that Sr. Draghi will leave his position in November never having presided over a hike in his eight years as President.

Draghi was at pains to blame outside factors for the slowdown in economic activity, mentioning the weakness being seen in the Chinese economy and the concerns of Eurozone firms over disruption caused by Brexit.

The ECB left its guidance that any increase in interest rates will not take place before the fourth quarter unchanged and is set to mirror the cautionary approach of the Federal Reserve although the Feds’ reasons for holding back differ greatly from those of the ECB. Draghi commented that “the risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties.”

It was not a totally negative speech as Draghi said that the underlying strength of the labour market and continued wage increases meant that inflation may start to pick up in the coming months.

The single currency fell to a low of 1.1294 versus the dollar before closing at 1.1308. There is now a real possibility that the recent support at 1.1230 may be tested as the market gears up for a fall towards the long term target of 1.1000.

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Dollar simply along for the ride (for now)

The dollar index rallied to a high of 96.68 yesterday before closing at 96.54 as the greenback reacted to the weakness of the single currency. There been very little that has changed to drive a positive note for the currency as trade talks between the U.S. and China continue at a snail’s pace and there seems to be no sign of a thaw in relations between the President and Congress that has led to the longest shutdown of the Federal Government in history.

President Trump will want to leave office in a little under two years time with more of a legacy than having presided over the longest shutdown ever and having the lowest approval rating of any President in living memory. That, of course, presupposes that he won’t be re-elected which is by no means certain.

The outlook for the U.S. economy going forward remains positive. Next weeks release of preliminary data for Q4 GDP, while not scaling the heights of last year, is expected to be around 2.8% which will be among the highest in G7. Forward-looking indices of service and manufacturing activity released yesterday were higher than both the previous month and market expectation.

Next week’s activity around the dollar will be dominated by the release of the employment report. The fact that it will be issued on the first day of the new month may mean a higher than usual level of estimates but any headline close to last month’s 312k new jobs and wage inflation remaining above 3% should see sentiment towards the dollar remain positive.

Dollar falls as the shutdown continues

Government shutdowns in the United States have been a relatively common occurrence for many years as it has been a tool used by both successive administrations to bend Congress to its will, and vice versa. They have generally been short-lived affairs as both sides have been careful not to lose popularity by “prolonging the agony” and quite often it has been down to the approval of the Federal Budget.

The current shutdown, however, is a totally different affair as two extremely hard headed personalities, Congress Majority Leader Nancy Pelosi and President Trump, lock horns in what is seen by many as the most decisive battle of the Trump Presidency.

It also goes to show that Trump was fortunate that, for the first half of his term, he had the benefit of a Republican-controlled Congress which was, at least nominally, on his side. That is certainly not the case now as 800k Government workers who haven’t been getting paid will testify.

Trump has now postponed his State of the Union address which was due to take place next week. He has conceded that until the shutdown is over he cannot make the speech. This was just as well as almost simultaneously, Pelosi withdrew the invitation to address the House.

It is impossible to judge just how much longer this standoff will last and who it is affecting the most. Until we are able to see tangible economic data, the first of which may be the employment report next week, it is impossible to judge where the most damage is being done. So far, it is more reputational but as soon as it becomes anything more tangible it is probable that the dollar will suffer.

Yesterday the dollar index fell to a low of 96.05, closing at 96.13 as the greenback’s recent rally came to an end.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”

Tags:Daily Market Brief