What will today’s European Central Bank meeting mean for the Euro?

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26 April 2018

thomasdodds

The Euro slipped back below the 1.22 level against the US Dollar on Wednesday, edging towards its weakest position versus the greenback since mid-January, as investors await this afternoon’s European Central Bank meeting in Frankfurt.

C
urrency traders are eyeing another dovish assessment of the Euro-area economy from ECB President, Mario Draghi, today following a recent bout of soft macroeconomic data in the Eurozone, namely weak inflation and a slowdown in the latest PMI surveys. At the most recent ECB meeting in the beginning of March, Draghi talked up downside risks while reiterating the need for policy accommodation. Since then, the composite PMI has fallen to a fifteen month low and core inflation remained stuck at just 1%. While economic projections will not be released today we, at the very least, expect Draghi to acknowledge the soft data witnessed during the first quarter and the less than favourable global backdrop amid rising US-China trade tensions.

Any change in forward guidance currently seems unlikely, with Draghi to stress that any interest rate hikes in the Eurozone remain some way off. Any comments during his press conference noting that the balance of risks are skewed to the downside may, in our view, prove enough of a catalyst to kick-start a run in the Euro back towards the key 1.20 figure. As we mentioned in our ECB preview report, we think that the central bank remains broadly supportive of a weaker currency, given its positive impact on the currency bloc’s export competitiveness.

Sterling remains stuck at five week low ahead of UK GDP data

During the London trading session on Wednesday, Sterling remained stuck around its weakest position in over a month against the Dollar, as US bond yields continued to march higher. With economic news light on the ground yesterday, price action in the UK remains dominated by growing doubt that the Bank of England will raise interest rates at its MPC next month. Following soft inflation, retail sales and earnings data last week, we think that Friday’s GDP number will take on added importance. An undershooting of the 0.4% quarterly expansion expected here could prove a significant Sterling negative this week.

As mentioned, the US 10-year Treasury yield continued to climb on Wednesday, having risen above 3% for the first time in over 4 years this week. With the spread between the US 10-year and corresponding yield in Germany now at its highest level since 1989, we think that additional gains could be on the cards for the US Dollar, as investors take advantage of the widening in interest rate differentials.