26 Mar 2019: ECB still has weapons to help the economy

ECB still has weapons to help the economy

March 26th: Highlights

  • Coeure believes ECB can still provide support to Eurozone economy
  • May still short of a majority as DUP shies away
  • Dollar suffers as risk appetite improves

ECB board member bullish on recovery of Eurozone economy

Benoit Coeure, a member of the Executive Board of the European Central Bank, in a speech yesterday, was positive about the ability of the Central Bank to manage the economy of the region back to health. The recent economic data releases from the region have been universally poor whether they have been country specific or for the region.

The data released by Germany on Friday showed that the largest and most dynamic economy in the Eurozone was headed for a deep recession, but that view was tempered slightly by further data released yesterday which showed that perhaps the situation is not as bad as had been believed.

Data for the current business climate in Germany rose from an upwardly revised 103.4 in February to 103.8 this month. This contrasted with market expectations which had been for a fall to 102.8.

Coeure was adamant that the ECB still had weapons that could see the Eurozone not only survive the downturn but could emerge stronger. According to Coeure, the current situation is not as grave as was seen in the aftermath of the financial crisis. He said that he is aware of what has been done already and is confident that there are further measures that can be taken.

While these are encouraging words, it remains to be seen just what else can be done to boost output in an economy suffering from a downturn in global trade and activity.

The single currency rallied yesterday versus a weaker dollar reaching a high of 1.1332 before settling back to close at 1.1311.

There are several ECB members expected to speak this week at the Central Bank conference taking place in Lisbon, but such is the sense of togetherness of Council Members, it is doubtful that anyone will stray from the script.

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May still unable to force her deal through

Despite the continual dire warnings of the calamitous outcome of a no deal Brexit, Prime Minister Theresa May is still unable to garner enough support for the Withdrawal Agreement she thrashed out with the EU last December. It now seems unlikely that any agreement can be reached before the deadline which is due to expire this Friday at 11 pm. The fact that Brussels has given Mrs May a further two weeks to come up with alternative suggestions will mean nothing if the UK does not agree to amend the law which confirms the UK’s departure this week.

With very little time left and Mrs May facing continual calls to leave her post in order to get the deal agreed it is hard to imagine any other outcome other than a far longer extension. That will certainly encompass the UK taking part in the European Parliamentary elections and possibly a General Election in the UK. With the Government and several members of the opposition set against either a second referendum or the May deal, it is hard to say what the outcome of a lengthy extension would be.

Brexit has become the single most divisive issue that has faced the UK since WWII and it is now clear that no matter the outcome close to 50% of the population will be disappointed.

When the referendum took place there was no talk of hard borders, backstop agreements or continued membership of any EU conventions. Out meant out and while it is argued that the public was ill-informed, the result has not been challenged by the myriad of remain supporters who believe that the entire process was flawed.

With the official deadline fast approaching it seems that the Prime Ministers ploy of counting down the clock is set to fail and unless there is a significant shift in sentiment, the current morass is set to continue for the foreseeable future.

Yesterday, the pound was stuck in a narrow range reacting more the weakness in the dollar than any significant driver of its own.

It rose to a high of 1.3246 before falling back later in the day to a low of 1.3182 as it became clear that another day has slipped by without any progress on Brexit.

Dollar awaits data to confirm Fed actions

The next edition of the jamboree that is the U.S. employment report is less than two weeks away and market participants are already speculating about whether there will be a pickup in new jobs meaning that last months’ measly 20k was an aberration or the Fed’s concern over the slowdown in the economy is justified.

It is hard to justify the market’s infatuation with the employment report despite its immediacy which makes it easy to understand. The simple equation is that the more people are in work, the more consumer spending will increase which adds to consumer confidence. More workers in full-time positions increases tax revenues which, in theory, reduces Government borrowing.

All these factors are wonderful in theory, but it is the future expectation in the shape of PMI’s and producer prices that have the most bearing on future Fed. actions.

The dollar has so many factors which affect its value that it is impossible to cling to just one, whether that is data, monetary policy, or trade. Add to that the dollar’s position as the global reserve currency and it is almost impossible to plot its future path.

In the absence of new information yesterday, the dollar fell on the back of improving global risk appetite. This was based upon no significant new driver but there is renewed optimism that the U.S. China trade talks are progressing as visits by the U.S. and Chinese officials to each other’s countries are imminent.

Yesterday, the dollar index fell to a low of 96.41 before closing a little high at 96.56.

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.”