Can the region avoid recession?

ECB President Mario Draghi has constantly maintained that the current slowdown being experienced by the Eurozone won’t develop into a full-blown recession. Today the financial markets get the opportunity to find out if Draghi’s confidence is justified.

There is a feeling that today’s release of Q1 GDP will mark the low in the current cycle despite evidence to the contrary. There has been no sign in recent data releases to expect that the region’s economy is about to pick up. The global economy, blamed for the fall in exports, still awaits the outcome of talks between China and the USA while domestic demand in the region remains sluggish at best.

The ECB is hamstrung, having no tools available to provide further accommodation. Since the financial crisis more than ten years ago the ECB has been unable to normalize interest rates due to the debts of several nations which continue to constrain growth. The whole issue is now becoming structural and could call into question the entire premise of the monetary union and single currency.

Today’s data, while backwards looking, is expected to confirm what the markets already knew; namely that the entire region remains in a downward spiral. Later in the week, PMI’s will be released that provides a view of how the coming months are being viewed and whether order books are starting to grow again. The expectation for Q1 is for the region to have grown at 0.2% but anything in positive territory will provide relief to the Central Bank.

Yesterday, the single currency traded between 1.1188 and 1.1144, closing a little higher on the day at 1.1185.

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Dollar retakes its place

The greenback has regained its dominance of financial markets with traders again looking towards the U.S. for clues about growth in global markets.

Both the UK and Eurozone are embroiled in their own issues, Japan is seemingly in a never-ending deflationary spiral and Chinese domestic growth is taking longer than expected to reach a level where it can look to dominate global markets. The American economy and the Fed’s interest rate policy remain the single most important driver for the market.

Last week’s significantly higher than expected GDP data will have been dissected by Fed analysts for discussion by tomorrow’s FOMC meeting and the conclusion is likely to be that the current policy of cautious optimism remains the most pertinent course of action.

The market’s attention is now on the comments to be made by Fed Chairman Jerome Powell following the announcement that rates will remain on hold. Fed officials will already have seen a “first cut” of the employment data, or at least have been told a ballpark figure, although Powell won’t allude to what the data looks like despite traders looking for “tell-tale” remarks.

Traders are already considering what Q2 GDP is going to look like having been “thrown a curveball” with an exceptionally strong headline for Q1 but the economy’s ability to repeat in Q2 is open to several questions regarding one-off factors.

Yesterday, the dollar index continued to correct although it is still well above its level from a week ago which indicates that the GDP data is being viewed positively by traders. It reached a low of 97.83, closing just one pip from that level.

Sterling ranges narrowing as Brexit grinds to a halt

Traders have become so used to receiving a daily dose of Brexit rhetoric on which to base trading decisions, ignoring almost any other factor, that they seem unable to wean themselves off.

With the economy behaving in a reasonable manner despite concerns over Brexit, inflation well controlled, employment (apparently) at record levels, and wage growth well above prices, the market sees the risks attached to Brexit as balanced for now which means the currency has entered a period of what can almost be considered stagnation.

There is little incentive to add to positions and for now, the market is in a state of flux.

The concern remains that at any moment a significant announcement could be made which would provide the market with direction and fresh impetus. Right now, it is difficult to imagine how Sterling will trade post-Brexit since every possible outcome has been dissected to such an incredible degree.

This week’s Bank of England meeting will vote 9-0 to leave interest rates unchanged and Governor Carney will affirm that the Central Bank is ready to provide any assistance to the economy no matter what the outcome of Brexit talks. He will go on to say that the economy is poised and ready for the challenges ahead while he fully appreciates the risks a no deal Brexit would bring.

Yesterday, the pound remained side-lined trading in a 1.2947/1.2904 range, closing at 1.2934.