ECB to lower its growth and inflation forecasts today?

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7 March 2019


The Euro remained pinned around the 1.13 mark against the US Dollar this morning, as investors firmly turned their attention to this afternoon’s European Central Bank meeting.

olicy will likely be kept unchanged with the market instead focusing on updated growth and inflation numbers, and Draghi’s comments regarding the possibility of a new round of TLTRO (Targeted Long Term Refinancing Operation). Expectations for the updated 2019 growth forecast are highly pessimistic. We are pencilling in a fairly meaningful downward revision from the previous 1.7% estimate. There has also been speculation in the past few days that a downward revision to this years inflation forecasts could be coming, which would probably trigger a bout of Euro selling.

There is also a very realistic possibility that Draghi announces the bank is considering a new round of TLRO, the long-term loans issued by the ECB to European banks, in an attempt to support the struggling Eurozone economy. A commitment to the aforementioned, combined with downwardly revised growth and/or inflation projections, could see the Euro test the 1.125 level this afternoon.

How will the next parliamentary Brexit vote impact GBP?

Sterling, meanwhile, edged modestly higher against the US Dollar during London trading on Wednesday, with investors not committing to large positions either way ahead of next week’s parliament vote on Brexit.

As we have reiterated in our recent special report ahead of the vote, we think that May’s withdrawal agreement will again be rejected by MPs by a sizable margin. In the very likely event that her withdrawal agreement is rejected and a ‘no deal’ is opposed, MPs will now, according to May, have the chance to vote on whether to extend Article 50 and delay the Brexit process. This looks highly likely to be the case, particularly given it would only take half a dozen MPs to shift allegiances in favour of a delay from the last vote on the subject from a few weeks ago.

The confirmation of an extension, we believe, would be good news for Sterling, given it allows more time for additional renegotiation and opens the door to a second referendum – something that the Labour Party is now officially in favour of. The magnitude of the rally in the Pound would, in our view, be dependent on the length of the extension proposed, with a longer extension likely to lead to a sharper upward move in the UK currency. There have been rumours that the European Commission is open to a two-year extension although, in reality, it is likely to be significantly less.

Away from Brexit, Bank of England member Michael Saunders, one of the more hawkish on the MPC, suggested that interest rates in the UK could be cut as well as raised in response to Brexit, citing a weaker impact of recent rate hikes. Investors did, however, largely overlook his comments in favour of expectations for next week’s Brexit vote.

US nonfarm payrolls report out on Friday

In the US yesterday, the monthly ADP employment change number came in below expectations, although there was a sizable upward revision to the January number to in excess of 300,000. This bodes well for a similar outcome from tomorrow’s far more critical nonfarm payrolls report. The market is eyeing up a monthly job creation number of around the 180k mark. We will also be paying particular attention to whether multi-decade low unemployment is continuing to filter its way through to higher wages.

Aside from tomorrow’s labour report, we think that the key test for the US Dollar this month will be the Fed’s monetary policy announcement on the 20th. Our base case is for a downwardly revised ‘dot plot’ that shows the Fed doesn’t expect to hike rates at all in the US this year. This would likely be bad news for the greenback and send EUR/USD back towards our 1.15 end of quarter projection.