Market News & Insights
2 October 2013

Will Mario Draghi and the ECB take Action?

EUR/USD 1.3535
GBP/USD 1.6209
GBP/EUR 1.1975 (0.8351)
EUR/CHF 1.2239
GBP/CHF 1.4660
GBP/AUD 1.7344

The big event of the day comes from the ECB and their interest rate decision and post announcement press conference. Political turmoil in Italy, mounting concerns about further assistance for Greece and Cyprus struggling to meet its own requirements may see the ECB begin to act. Mario Draghi is expected to keep interest rates on hold at .50% but we may see the ECB look to pursue further easing in order to encourage a stronger recovery.

The Eurozone has certainly turned a corner from where we were in the first half of the year, data has been somewhat more supportive with confidence indicators improving across the region and PMI data also supportive of economic improvements. The core is certainly leading the charge with data from Germany outshining the rest of the region and this is where we feel there is cause for concern.

Growing economic disparity has seen the gap widen between peripheral and core performance, unemployment across the region remains a serious concern with even German data disappointing yesterday and whilst we may have seen a bottoming out in Europe, we are a long way from sustainable growth. Massive levels of youth unemployment, particularly in the periphery and countries burdened by austerity are still a huge concern and whilst the financial system is far stronger than this time last year, the regions recovery remains fragile.

Draghi has testified that the ECB could implement another LTRO, however the excess liquidity provided to banks has not found its way back into credit growth for the end consumer. Draghi may also announce other non standard measures as deflation concerns rise – any signs of additional measure should see the EUR come under selling pressure. However, if the ECB simply reiterate the statement from September, the single currency may just get a further lift from the lack of action.

Overall yesterday started with a slight risk off tone but throughout the day as the market absorbed the US government shut down news we saw risk pick up slightly, although the USD also found some further support against lower yielding higher liquidity currencies. Both EURUSD and GBPUSD both rejected from fresh highs to test lower on the day as USD pulled back some of its earlier lost ground.

This was in part aided by weaker than expected employment data from Germany with the unemployment rate rising to 6.9% vs 6.8%, with Italian unemployment rising by more than was expected to 12.2% from 12.1%. Unemployment in the region as a whole however declined to 12%, following a downward revision to last months figures. Strong ISM manufacturing data also lifted the USD as it beat expectations posting 56.2 vs 55. Data like this will add support to a taper before year end and should benefit USD consistently.

Aside from today’s big event there is also construction PMI data from the UK, last month’s strong PMI reading sent GBP soaring to fresh highs and the pound has been riding the good data higher ever since, any sign of weakness may see some recent gains reversed.

The Non farms payrolls release is on the calendar for Friday although this is not expected to be released as the US Labour department is in shutdown and this means today’s ADP employment report could finally step up and take the employment data attention. Despite there being little correlation between the two readings the ADP is often looked at for a guide on trend – once again, as with all major US releases the results will be analysed on their influence around a possible taper.