Yesterday may have been a day of major central bank releases but that did not result in a day of major market action. With a host of key data and two major central banks due across the wires we would usually be battening down the hatches and preparing for a market storm but that was never going to be the case yesterday. In their last meeting, the ECB had provided markets with all the details for their next stage of QE and while they did taper they didn’t put an end date on purchases, leaving the euro open to some weakness. Draghi and co. were never going to shift that stance and despite signs of further growth across the Eurozone, Draghi remained notably cautious. Traders took this caution as dovish and the euro was moderately weaker on the day. It was also a similar situation for the BOE, we saw them in action in their last meeting when they raised rates for the first time in 10 years, yesterday’s meeting was never going to see additional shift in policy and the MPC voted 9-0 to keep rates on hold, while a modest assessment of the economy was aided by PM May’s progress on Brexit talks. GBP was slightly firmer on the day across the board.
Stateside and the USD index was slightly higher, the dollar clawing back some modest ground following the post FOMC selloff, this was helped by better than expected retails sales and manufacturing PMI data, but the services reading of PMI was notably weaker than expected and put a halt to upside USD momentum.
Mario Draghi delivered a measured assessment of the economy yesterday, his tone was optimistic yet cautious and he once again was keen to point out that the health of the Eurozone economy was on the back of the ECB’s large scale easing program, with asset purchases and record low interest rates that have been in place for some time. Eurozone data has continued to move to the upside and the release of PMI data this week would suggest that Eurozone growth heading above 3%, with that markets were looking to see if the ECB would shift their outlook. There was no suggestion of this and despite upgrades in growth estimates, Draghi’s assessment of inflation was quite different. The ECB forecast that inflation (HICP) will remain below 1.7% into 2020, still a way off the ECB’s 2% target. This would suggest that the ECB will be slow to tighten policy and remain cautious on exiting easing too early but this will be the big area to watch in Eurozone data next year. The Euro rallied through 2017 on tapering and tightening expectations and should the market feel the same way next year then the ECB could well have a battle on its hand to keep the euro’s value pegged lower. Trade balance data headlines this morning calendar but is unlikely to rock the boat too much.
The BOE added very little colour to their policy stance but the 9-0 whitewash vote to keep rates on hold was expected and nobody had any designs on anything different. It’s far too soon to assess to impact of the last rate hike. Carney will be writing his letter next February explaining why inflation is 1% above target but by that stage it’s expected to have already dropped back below 3%. An article in Bloomberg made a very valid point, the easy part of Brexit talks are done. The EU were united on what they wanted from the UK but the next step is trade talks. The chances of all EU nations being aligned in their expectations are slim. Trade talks are where things are really going to get dirty and while there is some optimism that progress has been made, if Bloomberg are correct and that was the easy part, then we are in for a roller-coaster 4 months.
Data is light today but we’ll be watching for Brexit related headlines from the EU meeting. EURGBP is back into a range, .8730 provides support, with recent lows below .8700 the next target. Any rally towards .8850 has run into sellers for the last three weeks so this marks first resistance to moves higher, while the .9000 area is the big red line holding real moves higher.
The USD saw a slight recovery yesterday as data was firmer but markets are currently more focused on the progress around Trump’s tax bill. There are still a number of hurdles in the way and this is weighing on sentiment at the moment. Not much in the way of USD data today and GBPUSD is holding its upper range, with support now around 1.3300 area which was previously resistance through OCT/NOV. Any press higher above 1.3550 is where sellers are lined up. EURUSD gave back most of its post FOMC rally, we are back below 1.1800 but 1.1700/20 area is where we see real support lined up.