10/09 – Euro in the cross hairs ahead of ECB meeting

GBP: Pound fears quelled slightly

EUR: ECB meeting due this afternoon

USD: Rebounds lower as stocks recover

Sterling

Sterling has recovered from the deep declines that it made yesterday as markets focused on the emerging row between the UK and the EU over the former’s desire to circumvent last year’s Withdrawal Agreement.

On publication of the document it seems clear to us that this is the UK government trying to find a way to put the EU on the back foot into the last month of trade negotiations. It is not quite a man dressed in dynamite strategy  – designed to blow up the talks entirely – but certainly makes us look a little less than reliable, but does create a lot of room for an upside surprise both in policy terms but also for the pound as well.

We are coming into a critical couple of days again with comments from both sides on this week’s talks due and further manoeuvring from politicians in the press.

Euro

As noted throughout the week, today’s European Central Bank meeting is the key piece of macroeconomic news both for the euro and for wider currency markets.

Central banking is as much a game of relativity as it is policy with the ECB’s main issue this month not just what is going on in the Eurozone but how they can mirror the Federal Reserve’s latest pronouncements of lower interest rates for seemingly as long as they want.

Failure to do so would likely see the euro spike across the board and further cut the Eurozone’s inflation outlook and we therefore expect that the ECB will emphasise to markets that they are more than happy and able to add more QE to their policy response and that reiterate the improved link between monetary and fiscal policy in Europe.

We do expect the euro to move higher in the coming months on a trade weighted basis but today’s meeting may offer those looking to buy the single currency the opportunity for slightly cheaper prices. There is always the case that the market doesn’t believe the ECB as well and takes on Mme Lagarde, who is still relatively new to the central banking arena.

US Dollar

A slight uptick in stock prices yesterday following a few sessions of deep dives allowed market sentiment to stabilise yesterday and the dollar to weaken. Whether that trend can continue today will largely depend on the news from Frankfurt this afternoon and how markets react to the ECB’s threading of the needle and we can easily see further USD losses should the ECB not quite find the mark.

Political news from the US also allowed the dollar to weaken with a slew of opinion polls confirming that President Trump has it all to do to retain the White House at this November’s election. Whilst betting markets offer a 40%  chance of winning, most pollsters see this closer to 20% with less than 8 weeks until polling.

Elsewhere

The battle to replace Japanese PM Shinzo Abe looks set to confirm current Cabinet Secretary Yoshihide Suga soon in an appointment that would largely continue the current way of doing things in Japan. We certainly expect in the interim that the Bank of Japan will hold fire until a new PM is in place, offering little reason to push against the trend in the yen currently.

Have a great day.

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Jeremy Thomson-Cook

Jeremy Thomson-Cook

Jeremy has over 13 years experience working in the FX industry. As a specialist in political risk mitigation and currency hedging, he regularly advises clients on the day-to-day moves of the markets and the implications of fiscal and monetary policy on international businesses.