Currency Note

ECB meeting dominates the day but traders ‘ignore’ Draghi

By Christopher Nye July 21st, 2017

quantitative easing programme

Sterling ended last week so hopeful and expectant having strengthened across the board last Friday. Yesterday, following the European Central Bank meeting it continued its downward path, weakening against the euro and the US dollar. The main winner this week has been the euro.

As expected, the big news of yesterday was the ECB meeting and subsequent press conference. In a move that was hardly surprising, ECB President Mario Draghi announced that interest rates would be left unchanged. This means that the headline interest rates remain at their record low of 0.0%.

What was more surprising was the central bank’s decision to resist tapering its stimulus scheme. There had been increasing speculation that a policy change might be imminent, most likely in the form of a tapering of quantitative easing (QE), but Draghi’s tone was more dovish than many expected. Ultimately, the markets decided they weren’t buying Draghi’s comments, as the euro strengthened.

It’s a fairly quiet day for economic data today, so now would be the perfect time for you to register for our next webinar on 26 July at 11am. Our currency risk management experts will be talking you through some of the things to consider if you have foreign currency exposure.

GBP: sterling slides despite positive sales

Despite the positive reading we saw for UK retail sales, sterling still came under pressure. Retail sales rose by more than expected in June, posting a reading of 0.6% against an expectation of 0.4%. The positive reading was largely because of a particularly warm June which boosted the sale of clothing.

Retail sales is a key economic reading as consumer spending makes up to close to 75% of the Gross Domestic Product number. However, economists were quick to warn that the market should not get carried away with the figure as it was a seasonal move and real wages are sliding against inflation.

In the meantime, sterling remains vulnerable following the decline in inflation, which in turn reduces the likelihood of a rate hike. In addition the EU’s chief Brexit negotiator has urged the UK to be more forthcoming. He has asking for more ‘clarity’ on key issues, such as citizen rights and the ‘divorce bill’.

Looking to the day ahead, we have the public sector borrowing numbers.

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EUR: the market doesn’t buy Draghi’s dovish tone

The single currency surprised the market with the way it performed yesterday following the ECB interest rate decision. They kept interest rates on hold as expected, but it is the press conference that the market watches more closely. In what appeared to be a cautious tone, Draghi stated that a ‘substantial degree of accommodation is still required’, and that ‘underlying inflation is yet to show convincing signs of a pick-up’.

This goes against the grain of what some thought based on the rhetoric from Draghi and other voting ECB members in the weeks leading up to the meeting. It was hoped by some that there would be some signposting of QE tapering, but apparently not.

Despite these dovish comments, the euro strengthened. This suggests that the market does not buy into the tone that Draghi was relaying. Either that, or the tone was one the market expected and following the risk off period leading up to the press conference, investors merely resumed their trades.

It is a quiet day ahead but the market is likely to attempt to decipher today’s comments from the ECB and keep an eye out for any further comments from ECB members.

USD: dollar benefits after ECB press conference

The US dollar strengthened for a second successive day yesterday against sterling after falling to a 10-month low earlier this week. The move was driven by Draghi and the ECB.

The dollar has struggled in recent weeks against a basket of currencies and all eyes are now on US GDP data which is out next Friday.

Today sees a very quiet day from the US, and therefore direction will likely come from the fallout of the ECB press conference yesterday and any political news.

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