Euro retraces gains ahead of crucial ECB meeting

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6 June 2019


The Euro retreated from its strongest position in over six weeks against the US Dollar on Wednesday afternoon as investors geared up for today’s European Central Bank announcement.

worsening in sentiment towards US-Mexico trade talks was mostly to blame for the decline in the common currency, with investors once again flocking to the safe-haven currencies, predominantly the Japanese Yen. Attention is now firmly on the ECB, with the central bank set to announced more details of its recently announced TLTRO programme.

Economic data out of the Eurozone has been pretty poor since the last meeting, with recent inflation and PMI numbers coming in worse-than-expected. External risks to the outlook for the Euro Area have intensified in recent weeks, which we think will keep pressure on the ECB to maintain its dovish stance. The US-China trade war has taken a turn for the worse in the past month and is already being reflected in weaker German sentiment indicators.

We therefore think that the terms of the TLTRO programme will be quite favourable to European banks and see it as likely that President Draghi will continue to reiterate no plans for a rate hike for the foreseeable future. The key to the reaction in the common currency may, however, be the bank’s updated growth and inflation forecasts. A surprise downward revision to either could spark a further sell-off in the Euro today.

Fed members Kaplan and Williams to speak today

US Dollar strength yesterday was somewhat surprising, given recent heightened expectations for Federal Reserve rate cuts this year. FOMC members Bullard and Powell have both kept ajar the possibility of cuts at upcoming meetings this week. We do, however, think that calls for a cut as soon as July is far too premature. We would likely need to see a worsening in US-China relations and some form of pass through to US data to force the Fed’s hand. Upcoming speeches from FOMC voting members now become key. Members Kaplan and Williams will both be speaking today, with any comments on monetary policy potential market movers.

UK services activity shows surprise pick-up

Sterling found some temporary strength from some surprisingly resilient services activity data on Wednesday. Following the dire manufacturing and construction PMI releases earlier in the week, expectations were low for yesterday’s services index. The index did, however, beat expectations, coming in at 51.0 in May versus the 50.6 priced in. That being said, this is still only just above the level of 50 denoting flat growth and continues to suggest that uncertainty over Brexit is having at least some form of dampening effect on UK economic activity. With no data on tap, a speech from BoE Governor Carney will be the main focal point in the UK today, aside any fresh developments on Brexit.