ECB likely to remain unmoved
Morning mid-market rates – The majors
April 27th: Highlights
- Economic concerns remain
- Inflation still benign
- Draghi in danger of getting “behind the curve”
Cautious ECB facing German wrath
The difficulty of trying to create a coherent monetary policy for nineteen diverse economies was never starker than it is right now. As well as dealing with pockets of self-interest there is no blueprint for Mario Draghi to work to.
Until every part of the Eurozone economy is harmonized it will remain an impossible job. The ECB has no tax raising powers of its own, the member states have their own growth and inflation concerns and the needs of every economy remain massively diverse.
It is a constant theme that nothing of this scale has ever been tried before and the outcome remains in the balance. Germany, for example is paying a massive price in economic terms but until the Eurozone members can look beyond their own state borders and become a single nation, doubts will remain.
Today’s meeting of the European Central Bank Governing Council is likely to vote to leave both rates and the asset purchase programme unchanged. Economic activity is starting to grow, sentiment indicators are improving and growth is returning. The one measure that is still stubbornly unmoved is inflation. There are pockets where it is growing above trend, Germany being the prime example, but Eurozone wide it remains well below 1% and therefore is not of concern to the ECB.
The Euro is struggling to make any further ground following the relief rally created by the French election result on Sunday. It has been a week of consolidation across the board. The 1.0900 level has become supportive for the single currency having been stubborn resistance for quite some time, but further advances are proving difficult to sustain.
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Sterling facing diverse drivers
The news that there is a real possibility that Theresa May could win a landslide victory in the General Election is underpinning the pound, but further substantial gains will be strongly linked to economic activity.
In contrast to the Eurozone where growth is returning but inflation is benign, in Britain the opposite is true. Growth in inflation is being placed firmly at the feet of a weak currency but that effect will start to wain and the MPC is going to be faced with either rising growth or stubbornly high inflation as the driver of a change in interest rate policy.
The next MPC meeting is on May 11 and is in conjunction with the release of the Quarterly Inflation Report.
Sterling is drifting between 1.2800 and 1.2900 while it has recovered from the fall on Monday caused by the French election against the Euro, trading close to 0.8450.
Statesman Trump re-emerges
Having announced a major initiative on tax reform last week, the reality of the policy was simply more of the same.
The President then threw some crumbs of comfort to Mexico and Canada by withdrawing the threat of scrapping the North American Free Trade Agreement (NAFTA) and agreeing on a renegotiation. The effect is likely to be the same in any event.
Finally, he authorised the commencement of joint military exercises with South Korea in a clear show of strength to the North. Kim Jong Un is likely to be unmoved as he continues to flout U.N sanctions and resolutions.
It is reported that the President summoned Senators to the White House to brief them on his plans for North Korea.
He is supposed to ask their permission to escalate any further military plans but asking permission is not his strongest suit.
“Well, that was a busy day!”
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.”