ECB Signals Return to Normality

Euro rises as ECB turns a little hawkish

Traders were caught a little off balance yesterday by a statement from the ECB following their meeting yesterday. At the press conference, Mario Draghi commented that a change of wording, which removed reference to “extraordinary measures”, had been decided because the “sense of urgency” no longer exists.

A cynic may see the “hand of the Bundesbank” driving such a comment but traders took it at face value and bought the single currency. It was 0.2% stronger against the dollar, rising close to 1.0600, but still remains 0.3% lower on the week.

Draghi raised the growth and inflation expectations for the region but remained cautious retaining the reference to “lowering rates should the need return”, in the statement.

Against Sterling, the Euro continued the rise that has been in place since the 0.8402 low was seen on 22nd February. The single currency has closed higher against sterling in ten of the last eleven trading days. It ended yesterday at 0.8713, slightly off the high of 0.8722. Market orders are straddling the current range at around 0.8725 and 0.8580 for now.

Political headwinds are never far from the surface in the Eurozone and traders will be fearful of a populist/nationalist backlash in the Dutch election which takes place next Wednesday.

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Employment Report retains potential to surprise

The major event next week is the FOMC meeting to determine U.S. monetary policy. There are also rate decisions in Japan. Switzerland and the U.K. so it will be interesting to compare monetary policy in two ultra easy monetary policy economies with two that are, if not hiking already, are seeing data that is pointing in that direction.

A hike in official rates is 90% priced in by the markets and the dollar has risen 1% against the JPY this week. A stronger dollar against the JPY (seen as a safe haven currency) shows the market has increased confidence and attitude to risk. A rate hike next week may signal a correction for the dollar as the dollar index is exhibiting signs that it is overbought.

Today’s non-farm payrolls report released at 13.30GMT is forecast to show job gains of about 200k which will cement a rate hike next week. The ADP report of private sector jobs surprised to the upside and given the market’s newfound confidence in that report there is no reason to doubt that a strong number is likely. The most likely shock is in the revisions to previous months data. It is extremely difficult in such a vast country to totally accurately determine the number of jobs created so the model used is under constant modification. The patchy growth seen where certain states grew at an appreciably faster rate that others threw the model off for a while which leads to corrections of up to 20%.

Sterling weaker as traders chew over budget numbers.

The rise in tax contributions for self employed workers drew howls of protest from opposition Members of Parliament when it was announced on Wednesday but the move has been welcomed by economic think tanks. This authentication of the policy saw sterling rise by 0.2% against the dollar. The pound made a new low around 1.2130 yesterday but the 1.2120 support held and a rally to close at 1.2170 followed.

The optimistic view of the Chancellor for growth surprised traders as did his relatively dovish view on inflation. It will be interesting what the MPC say following their meeting on 16th March.