Euro Awaits ECB Policy Decision
October 26th: Highlights
- Central Bank to pare back Asset Purchases
- U.K. Growth again clouds rate hike decision
- Government Ministers at odds over Brexit vote
Euro Stronger as Traders consider tighter monetary policy
Sr. Draghi has been clear in his advance guidance to markets that until the ECB feels that the entire region can “stand on its own feet”, monetary policy will remain loose. Inflation is under control, growth is returning slowly and activity indexes are indicating an expansion, but the ECB will maintain its cautious approach.
The single currency rose to 1.1818 and continued to exhibit strength overnight reaching 1.1833. Versus a stronger pound, it fell to 1.1261 before rallying to close at 1.1228.
The ECB strives to be the most transparent of the G7 Central Banks with its President keen to keep markets appraised of the Governing Council’s thinking. Following Sr. Draghi’s confirmation that the Asset Purchase Scheme would be discussed at today’s meeting a cut in the amount of monthly purchases and a lengthening of the overall programme are likely to be the outcome.
Stronger U.K. Growth fans rate hike flames
Yesterday’s rise of 0.1% over the previous quarter for Q3 preliminary GDP received an almost rapturous reception from traders who now believe a rate hike next week is certain. Interest rate futures now predict an 84% chance that rates will rise by 0.25% but the motives behind any hike are still open to question.
There is little doubt that the economy faces strong headwinds over the next eighteen months while the details of Brexit are agreed (or not). A hike simply to provide “wiggle room” would be unnecessary and would probably have the opposite of the desired effect on the pound.
The pound rallied on the back of the GDP data more than erasing losses from an ambiguous comment from MPC member Jon Cunliffe who said an interest rate hike was an “open question”. Sterling has reached a high of 1.3280 versus the dollar overnight with further gains possible.
Brexit vote continues to excite Parliament
The opposition Labour Party commented earlier in the week through their Shadow Brexit Minister that they would try to rally all party support for a revolt in which the Government would be forced to seek Parliamentary approval for the terms of the final deal.
With macroeconomic data and monetary policy dominating the markets, once the dust settles on any possible rate hike, there is sure to be a reaction to continued Government mishandling of the entire Brexit process and the lack of clarity over the main issues.
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.”