Currency Note

ECB meeting likely to dominate markets today

By Christopher Nye July 20th, 2017

European Central Bank

All told, it was a pretty quiet day yesterday, but given the recent, often overwhelming, spate of political and economic data we’ve had, it was a welcome period of calm before the potential storm of today.

Indeed, Thursday is set to be an extremely busy one, as the European Central Bank holds its latest monetary policy meeting. There has been mounting speculation that a policy change might be imminent, most likely in the form of tapering quantitative easing (QE). If that is confirmed, we could see some movements in the euro against a basket of currencies. If Draghi strikes a bullish tone, the euro could strengthen significantly.

Other news that might sound alarm bells for the UK came in a new research note, in which Credit Suisse suggested there was an approximately one-in-three chance that Britain’s economy falls into recession later this year. The slowing economy is starting to worry some of the City and the underwhelming progress made in Brexit talks so far will do nothing to ease concerns. That is why today’s UK retail figures will be very closely scrutinised when released later today.

Next week, two of our currency risk management specialists will be hosting a webinar in which they will look at some of the events for the second half of 2017. It’s simple to register and it takes place on 26 July at 11am.

GBP: sterling takes a little time out

The pound moved very little after Tuesday’s decline, which followed the release of a weaker-than-expected inflation number. This has helped quell some of the expectations of an interest rate hike in the near future.

However, there are still murmurs in the market that inflation could push higher by the end of the year as the GBP and EUR pairing has declined considerably in the last three months. If this impacts inflation then the interest rate debate will rear its head again. Watch this space.

Today we have a big number set for release, as the retail sales number hits the wires. Consumer spending makes up a large part of the GDP number and it is expected to rebound slightly from last month’s decline of 1.2% to post a positive 0.4%.

EUR: market awaits comments from Draghi

Yesterday was a quiet day ahead of a big one for economic data. The euro dropped slightly from its 14-month high ahead of today’s headline event – the highly anticipated ECB meeting, which signals the last major policy decision before the summer break.

Comments from ECB members of late have been optimistic to the point that the market is expecting an announcement on tapering QE. This is a significant part of the reason the single currency has been strengthening, though the respective weaknesses of sterling and the US dollar contributed too.

The main focus of the meeting will be a decision on rates, but the rhetoric and tone of ECB President Draghi’s press conference will be studied intently. If he continues to be optimistic about the eurozone, we could see a strengthening in the euro, but if he strikes a more dovish tone it could pull back from its recent highs.

USD: quiet day for the dollar but political uncertainty continues

The dollar has been trading within a 50-point range against the euro and sterling.

The Federal Reserve has slowly started to sell some of the $4 trillion of assets they hold. Combined with the normalisation of monetary policy, this move could lead to increased volatility in the dollar. Such an increase could support strength in the US dollar, as investors move away from the risks associated with emerging markets and investment in the dollar.

However, due to the current political uncertainty surrounding the Trump administration and its failure to get the latest draft of the US health care bill through the Senate, there is still a short-term risk that the dollar will weaken further.

Yesterday saw Building Permits from the US at 1.25 million which was a positive increase and crude oil inventories came in at -4.7 million against a -3.6 million forecast. The data had little impact really on what was a pretty quiet day for currency markets.

Today we have the latest unemployment data out from the US.

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