Dovish ECB Pushes Euro Lower
October 27th: Highlights
- Asset Purchase Scheme halved and extended
- Euro falls to three month low
- Caution over rate hike drives Sterling lower
Cautious ECB sees need for continued stimulus
ECB President Mario Draghi in his press conference following the meeting said that “an ample degree of stimulus remains necessary”. The Central Bank still halved the value of bond purchases, done to pump liquidity into the system, from sixty billion euros a month to thirty billion. However, Sr. Draghi also announced that the programme would be extended until September 2018.
Despite this being what analysts had expected, the reality of the necessity for continued stimulus pushed the single currency to a three-month low versus the dollar at 1.1640. The ease with which it broke supposed strong support at 1.1680 was surprising as stale long positions were liquidated, and next week’s Eurozone wide Q3 GDP data will now take on added significance. The expectation is for the economy to have grown by 0.6% quarter on quarter and by 2.3% year on year, but any downside surprise could see the Euro fall further.
Sterling falls as GDP fever evaporates
The recent data has been insufficient for the three most dovish MPC members to change their minds since wage inflation is non-existent and the continued weakness of the pound, driven by Brexit fears, is not going to change this side of year end.
The misreading of the guidance provided by Governor, Mark Carney, in which his comment that a “rate hike would be necessary in the coming months” was taken to mean next month, has also been accepted as perhaps not quite as hawkish. Carney has become highly adept at bending the market to his will and this a talent that will be sorely missed when he departs in eighteen months time. The pound has fallen to 1.3113 versus a dollar which has strengthened by default. Versus the Euro, the pound made ground as the ECB illustrated what could happen next week if the Bank of England is more dovish than expected.
Politics still providing backdrop to economic concerns
Spain remains in crisis over the Catalonian secession issue as confusion reigned yesterday with the President of the previously autonomous region first announcing the dissolution of Parliament then cancelling a press conference ruling out a snap election. Meanwhile Brussels looks on in an almost disinterested manner as European Council President Donald Tusk distances the EU from what he calls a purely domestic matter. It seems that Federalism only works when it can be imposed unopposed.
Brexit continues to provide the backdrop to every aspect of life in the U.K. In traditional fashion the British public have grown weary of the continued barrage of hard versus soft, deal or no deal which dominates TV news.
Donald Trump is expected to announce the new Chairman of the Federal Reserve next week before heading off to Asia. The positive effect of the choice of the favourite, John Taylor, will need to be cemented by a rate hike at December’s FOMC meeting.
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.”