Euro Rallies as ECB Considers Change
January 12th: Highlights
- Withdrawal of stimulus could be sooner than expected
- Sterling mixed versus weaker dollar
- Dollar hit by rates doubt
Hawkish ECB minute’s drive Euro higher
There is a new discussion developing not only at the ECB, but at other G7 Central banks as well, about the timing of changes to monetary policy and whether they should be proactive or reactive. In the past, Central Banks, driven mostly by the Fed, tried to be more proactive anticipating changes in growth and/or inflation and adjusting rates accordingly. As the global economy has emerged from the global financial crisis, they have tended to become more reactive as inflation has been benign and growth patchy.
Yesterday’s minutes which showed that the ECB will need to start to consider the withdrawal sooner than had been discussed earlier returned the single currency to positive territory. It managed to break back above the pivotal 1.1980 level versus the dollar reaching a high of 1.2060 before closing at 1.2030. The gains have continued overnight with a new weeks’ high of 1.2067 being seen.
Farage re-enters Brexit Debate
The best hope of a further referendum would not be around another “in/out” vote but on the acceptance, or otherwise of the final agreement that London reaches with Brussels.
Sterling barely reacted to the news. It was on the back foot versus a surging Euro, falling to a low of 1.1221 before closing at 1.1250. Versus the dollar, it had a more turbulent day, falling from an opening at 1.3512 to 1.3458 before recovering to close higher at 1.3535.
Data released yesterday showed that the UK total trade deficit widened between October and November last year, “due primarily to an increase in goods imports of fuels from non-EU countries”.
Dollar suffers as producer prices fall
The dollar is becoming far more sensitive to the outlook for U.S. inflation since the new Fed Chair is likely to be more reactive than his predecessor who was more inclined towards proactivity and advance guidance. The hawkish tone of several FOMC members, in speeches so far this year, will be tempered by the data.
The dollar index fell to a low of 91.79 and the decline has continued overnight with the index making a new low of 91.73 its lowest level since September 20th. The move has been magnified as the dollar and euro react to opposing drivers. Yesterday’s news was positive for the single currency while the dollar suffers its own headwinds.
Next week starts with a holiday in the U.S but will be dominated by inflation data in both the UK and Eurozone following today’s release of CPI in the U.S.
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.”