Euro Awaits ECB Policy Decision

Euro Stronger as Traders consider tighter monetary policy

The Euro gained against the dollar yesterday as traders decided that the risk at today’s ECB meeting is for a hawkish surprise. However, considering the recent data releases for the entire Eurozone, the chances of Mario Draghi, the ECB President, leaning towards a tightening of policy at his press conference following the Council meeting appear slim.

Sr. Draghi has been clear in his advance guidance to markets that until the ECB feels that the entire region can “stand on its own feet”, monetary policy will remain loose. Inflation is under control, growth is returning slowly and activity indexes are indicating an expansion, but the ECB will maintain its cautious approach.

The single currency rose to 1.1818 and continued to exhibit strength overnight reaching 1.1833. Versus a stronger pound, it fell to 1.1261 before rallying to close at 1.1228.

The ECB strives to be the most transparent of the G7 Central Banks with its President keen to keep markets appraised of the Governing Council’s thinking. Following Sr. Draghi’s confirmation that the Asset Purchase Scheme would be discussed at today’s meeting a cut in the amount of monthly purchases and a lengthening of the overall programme are likely to be the outcome.

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Stronger U.K. Growth fans rate hike flames

The strength, or otherwise, of any piece of macroeconomic data is always open to conjecture. The author Mark Twain first coined the phrase; there are lies, damned lies and statistics. This is certainly true of the employment data on both sides of the Atlantic and can be applied to most data where the ability to interpret is certainly valuable.

Yesterday’s rise of 0.1% over the previous quarter for Q3 preliminary GDP received an almost rapturous reception from traders who now believe a rate hike next week is certain. Interest rate futures now predict an 84% chance that rates will rise by 0.25% but the motives behind any hike are still open to question.

There is little doubt that the economy faces strong headwinds over the next eighteen months while the details of Brexit are agreed (or not). A hike simply to provide “wiggle room” would be unnecessary and would probably have the opposite of the desired effect on the pound.
The pound rallied on the back of the GDP data more than erasing losses from an ambiguous comment from MPC member Jon Cunliffe who said an interest rate hike was an “open question”. Sterling has reached a high of 1.3280 versus the dollar overnight with further gains possible.

Brexit vote continues to excite Parliament

Not content with arguing over the terms of Brexit with Brussels, the U.K. Government continues to be divided over just about every aspect of Britain’s departure from the EU. Yesterday, David Davis, the Brexit Minister commented that it was possible that Parliament may not get to vote on the terms of Brexit until the decision had been made. He appeared to be contradicted by his boss, the Prime Minister who said, again to Parliament, that there would be a vote on the final terms before March 29, 2019. Whether she will still be Prime Minister then or, indeed, if the current Government will still be in place is also a matter of conjecture.

The opposition Labour Party commented earlier in the week through their Shadow Brexit Minister that they would try to rally all party support for a revolt in which the Government would be forced to seek Parliamentary approval for the terms of the final deal.

With macroeconomic data and monetary policy dominating the markets, once the dust settles on any possible rate hike, there is sure to be a reaction to continued Government mishandling of the entire Brexit process and the lack of clarity over the main issues.