Sunday 18 August 2019

Daily Market Update: Euro remains under pressure as markets continue to eye more ECB stimulus

Simon Barry

The euro remains under pressure on the currency markets, with the single currency adding to recent losses in early‐week trading.

The past 24 hours have seen a further 0.9% and 0.7% decline in Eur/USD and Eur/Stg respectively to take them to seven and three month lows of $1.0650 and 70.1p respectively this morning. Echoing its weak close last week, the euro was struggling for most of yesterday’s session, with dovish comments from ECB Chief Economist Peter Praet overnight adding to the downside momentum. Praet said that “we have some signals that inflation expectations are still fragile…there are risks and this is why we’re considering further action”, adding that updated inflation projections may show a further pushing out of the timeframe in which inflation gets back to target. So little here to discourage the view that more ECB stimulus could well be on its way, albeit that yesterday’s inflation figures for the zone were actually a touch firmer than expected (with headline inflation revised up to 0.1% from 0.0%, and core inflation revised also revised up a tenth to 1.1% ‐ its highest level since August 2013).

To put recent euro moves in context, as recently as five weeks ago, Eur/USD was trading close to $1.15 and Eur/Stg close to 75p, with the 7%‐plus declines since then serving as another reminder of how quickly very large moves often take hold in fx markets. As to the reasons for the fall, regular readers will be familiar with the emphasis we have been placing on the theme of monetary policy divergence across several of the major economies as a key driver. In particular, a good chuck of the recent downside move in the single currency can in our view be attributed to the very dovish signals which emerged from the October ECB press conference when Draghi hinted strongly that the ECB wa actively contemplating injecting more stimulus into the euro zone economy. Meanwhile, expectations have been building that the Fed will be tightening policy by year end, and the Bank of England’s next move is also likely to be a tightening, though the BoE looks set to lag a bit behind the Fed.

All of which adds up to a recipe for a weaker euro, especially relative to the dollar where the divergence is more acute given the imminence of the first US rate hike in nine years. And so to us it continues to look as if the path of least resistance for Eur/USD continues to be lower for the time being. As we have noted previously, the low of the year of around $1.0460 (reached in March) looks like a natural target in the short term as markets count down to the ECB meeting on December 3rd. Similarly, this year’s low of around 69.35p in Eur/Stg could well be tested in coming sessions.

Looking to the day ahead, US CPI inflation figures are released this afternoon. Expectations are for a pickup from 0.0% in September to 0.1% y/y growth in October. The bulk of attention will be on the core (ex. food & energy) rate – as investors continue to gauge the probability of a December rate hike – and this is expected to advance 0.2% m/m, which would see the annual rate remain at 1.9% y/y. Additionally, industrial production is expected to increase 0.1% m/m in October after ‐0.2% in September.

In the Eurozone, the ZEW survey is announced in Germany. Expectations are for the current situation component to remain at 55.2 in November and for the forward expectations element to rise from 1.9 in October to 6.0. While the ECB have maintained that domestic demand is holding up reasonably we in the face of external weakness, analysts will be looking for clues regarding the health of economic activity in the Eurozone in the 4th quarter after the moderation in GDP growth in Q3 revealed last week.

In the UK, CPI inflation is released this morning. Expectations are for a negative inflation reading of ‐ 0.1% y/y for the second consecutive month in October. However, the core (ex. energy, food, alcohol, & tobacco) measure is expected to remain at 1.0% y/y growth. In their November Inflation Report, th Bank of England highlighted that lower import prices (mainly due to prior sterling appreciation and weak commodity prices) are likely to continue to have a dampening effect on inflation in the short term time, so another subdued inflation reading is not likely to have any significant ramifications for UK monetary policy in the short term.

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