EUR: ECB to meet amid European strains
Typically European Central bank meetings take place on a Thursday but this month’s is today so as to allow ECB members the ability to get to meetings with the IMF tomorrow. Of course, this meeting comes only a day after the Trump administration announced its plans to add fresh tariffs on certain European goods and the pressures on the wider European economy are harsh at the moment.
Yesterday saw Italy revise its growth expectations down to 0.15 on the year – almost nothing – whilst revising their budget deficit higher, while data from Germany has shown that the industrial slowing is pushing their growth rates down to the lowest in six years.
In this circumstance, is there any surprise that the European Central Bank was dovish last month and will be so again today? How the currency reacts will depend on two things; the focus the ECB puts on it’s additional lending to banks via its Targeted Longer-Term Refinancing Operations (TLTROs) and whether they move forward with a plan to tier their interest rates to exempt some bank reserves from the current negative interest rates.
The decision will take place at 12.45 BST with the press conference at 13.30.
GBP: Another year?
While Friday remains the default no-deal Brexit day, there is very little chance that the UK leaves the European Union at 11pm on Friday night. Tonight’s meeting in Brussels is a decision on what terms the European Union will attach to any extension offered to the UK. The broad feeling that I am getting from people closer to the political side of the story is that the UK will be offered an extension of up to a year and that will be agreed upon at some point in the early hours of tomorrow morning.
In the event that an extension is not agreed, the focus will switch back to the Commons with MPs likely to table an emergency vote in favour of revocation of Article 50.
Sterling leapt higher briefly on an erroneous report that Angela Merkel was willing to time-limit the Northern Irish backstop for five years. The report was quickly squashed by the German Chancellery but shows the danger that presents itself when sterling listens to politicians getting into cars. An extension is almost entirely priced into sterling and therefore we see limited upside for sterling today and overnight from the back and forth in Brussels.
The meeting in Brussels is not set to start until 7pm tonight.
USD: Inflation could drive further USD strength
The Federal Reserve meeting minutes are due this evening after this afternoon’s look at US inflation. Last week’s jobs number swung some sentiment back in favour of the Federal Reserve holding rates as is for longer as opposed to cutting anytime soon and a rebound in US CPI this afternoon could further that argument, helping the US dollar. Two data points are not going to turn the tide on their own but coming as oil prices start to rise, minds may be starting to move in favour of a Federal Reserve standing pat.
The latest Fed meeting prompted a sharp sell-off in the dollar as investors reacted to lower rate expectations and softer growth forecasts from the central bank. If these minutes fail to support such a thesis and next week’s earnings season from US corporates bring about a belief that Q1’s weakness was just a blip, then we will be back to talking about an outperforming USD.
Have a great day.