GBP/EUR 1.3057 (0.7664)
It is the day of deliverance for the ECB today as their QE steam train pulls in to station, what exactly is on board continues to drive market speculation and anyone expecting a quiet 24 hours before the official ECB release was sorely mistaken. Yesterday afternoon the newswires were a buzz with a reported leak, suggesting the ECB would be buying €50bln of assets per month, through to the end of 2016. Any supposed “leak” like this is treated with caution but that does not prevent additional volatility being created in markets that are already on a tenterhook. Other central banks were keen to show the ECB that they are not the only show in town, the BoC in Canada cut interest rates to .75% from an expected 1%, while the BOE minutes from January’s meeting saw the two members voting for rate hikes pull in their votes, with the MPC unanimously voting (9-0) to maintain interest rates at record lows.
We cannot emphasise enough the notable dovish shift across global central banks, the only central bank now apparently looking to raise rates is the FOMC, that’s certainly what interest rate futures appear to be pricing but can the US stand alone in holding off weak global inflation and weak growth prospects? We remain extremely sceptical of this stance and see potential for USD weakness should this hawkish Fed view change. Overnight markets have been steady, the surprise cut from the BoC has impacted the NZD and AUD, as other central banks take dovish positions markets are now concerned the RBNZ and RBA may follow suit, adapting looser policy and cut interest rates in their meeting due in the next couple of weeks. In European equity markets the prospects of QE drove stocks to seven year highs, while in the UK a dovish MPC coupled with improving labour market conditions and wage growth saw the FTSE advance 1.6%. This tone carried through in to the US session yesterday, with all 10 groups in the S&P contributing to a .5% rise.
Needless to say the big event of the day is the ECB and their expected announcement of a QE program, at this stage I am sure many of you are sick of reading about this and potential size, scale, scope etc, many now just want to see the real information. A reported leak yesterday afternoon suggested the ECB would be participating in €50bln per month until the end of 2016, which would be in excess of the median view and likely see additional EUR selling if it turns out to be true. We suggested earlier in the week that approx €750 bln in easing has been priced into current EUR positioning, anything less will likely be deemed as the ECB failing to deliver and we would expect to see EUR rally, however if the rumours are true and QE exceeds the €1trilion level then there is little doubt the single currency would decline further. Obviously the finer details here are very important, for example, the ECB may well look to do €50bln in asset purchases a month, but if they do not start it immediately, or delay beginning this until the second half of the year all of a sudden we are some €300bln short of expectations. The ECB’s decision is due at 12.45pm, with the press conference due at 1.30pm where the finer details should be revealed.
GBP faced additional selling yesterday. Labour market data signalled improving conditions while wage growth rose as expected to 1.7% providing a boost to UK households while inflation is at .5%. The main point of GBP selling however was caused by a shift in the voting of MPC members, we have warned all week that should McCafferty and Weale change their calls for rate hikes GBP pairs would come under pressure and this is exactly what has happened. Both members have been calling for rate hikes since last July however their change in stance has now seen UK rate hike expectations pushed further back into 2016 and I would not be surprised to see larger global banks announce their changes in outlook over the next week. Like everywhere else, while disinflation remains a concern the BOE are unlikely to look to raise interest rates. There are a number of BOE speakers across the wires this morning, but we are likely to have to wait for the BOE’s quarterly inflation report next month for more in depth detail on the BOE’s stance and view on inflation.
The USD continues to be the best of the rest and as such appears to be the default currency to turn to in almost all market conditions. The greenback only really losing out to JPY whenever risk appetite dries up. As discussed above, much of the USD’s strength has been derived from the Fed’s diverging policy outlook versus the rest of the world, as long as this stance remains the USD is likely to hold dominance, however any dovish shift from the Fed should put the USD under some selling pressure, we are unlikely to see this in the short term however.