Will ECB offer any surprises on Thursday?

Euro climbs ahead of ECB meeting

While we may not look back at the ECB meeting on Thursday as one of the defining moments in the eurozone’s long recovery from the global financial and debt crises, or even remember it much at all for that matter, that doesn’t mean there won’t be anything to take away from it, or that markets won’t react.

  • ECB left little to the imagination in June
  • Never a good idea to assume an uneventful meeting
  • Will Draghi succeed in talking down the euro again?

At its meeting last month, the ECB laid out plans for its bond buying program (quantitative easing) beyond the current expiry date of September, opting to extend it until the end of the year at half the pace – €15 billion – and warned that interest rates will remain at present levels “at least through the summer of 2019”.

In providing such a clear path for asset purchases and interest rates for the next year, the central bank effectively covered all bases and barring a significant shift in the data or a change in the global landscape, left few questions if any to be answered, making this meeting a potential non-event.

Juncker/Trump Meeting Eyed as Tariffs Hit Outlook

Should we ever anticipate a “non-event”?

One thing we’ve learned in the past though is not to become complacent when the central banks are involved and in the current environment of trade conflicts and Brexit, things can change very quickly. We have to remember that while the recovery is gathering momentum and making encouraging progress, it is still fragile and could be derailed by a number of events which would require the ECB to step back in and offer its support.

Only this week it has been reported that US President Donald Trump intends to slap 25% tariffs on European auto imports and significantly escalate the trade conflict between the US and EU. Jean-Claude Juncker is currently in Washington looking to calm the growing tensions between the two but it seems that unless he is offering concessions, he may not get very far.

What’s more, the UK and EU don’t appear to be getting much closer to agreeing on the divorce and with eight months to go until exit day, this is a notable downside risk for both economies, with the IMF recently warning that a no-deal Brexit that sees the two revert to WTO rules could wipe 1.5% and 4% off EU and UK output, respectively, by 2030.

In terms of the data, the ECB will likely be relatively content, with unemployment continuing to drop – now at 8.4%, the lowest since December 2008 – the economy growing well despite the dip in the first quarter and inflation gradually increasing, albeit less so on from a core perspective. Nothing has really changed on this front since the last meeting that will concern policy makers.

EURUSD Daily Chart

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While the euro has been climbing over the course of the last month, after falling following the ECB announcement and very dovish accompanying statements, it’s now only trading back where it was before the meeting which will be a relief to policy makers. It will be interesting to see if anything they say changes this or if Draghi focuses on talking it lower once again.

Juncker/Trump Meeting Eyed as Tariffs Hit Outlook

Investors look for another boost from earnings

US futures are pointing slightly higher again on Wednesday as indices look to extend the winning streak to three sessions on the back of strong earnings reports.

Investors have been encouraged by the results we’ve seen so far, with lower taxes not the only thing providing a big lift to the bottom line, although they are obviously a considerable contributor. Another 52 companies are preparing to report on the second quarter today, including Facebook, the second of three FANG stocks reporting this week and investors will be hoping for more strong figures after Alphabet’s report was so well received, despite the $5 billion fine that was imposed on it last week.

Trump and Juncker to set the dollars tone

German IFO beats expectations but business worried about outlook

One of the few pieces of data that was scheduled for release today was the German Ifo business climate survey and the results were broadly as expected, with businesses feeling positive about the current climate and anxious about the outlook. Overall, the index fell marginally to 101.7 which was slightly higher than expectations and signals continued decent growth in the eurozone’s largest economy.

The continued decline in the expectations component of the survey is likely being driven by the ever-increasing threat of a trade war, with US President Donald Trump now taking aim at the eurozone as the conflict with China heats up. Germany has been a particular focal point of his attacks on the eurozone, with the country benefiting from a weaker euro which is more a reflection of the region as a whole rather than its own economy.

German IFO Business Climate

German IFO Current Assessment

German IFO Expectations

Juncker heads to Washington in attempt to cool trade conflict

Trump has repeatedly threatened tariffs on the European car industry which would disproportionately hit Germany and is likely factoring into businesses less optimistic outlook. It will be interesting to see if anything can be achieved during Jean-Claude Junckers visit to Washington today, with the European Commission President hoping to convince Trump to drop plans to impose tariffs on the EU, something I am not hopeful he will be able to achieve.

The IFO number did lift the euro in early European trade and it now finds itself around a tenth of one percent higher against the dollar on the day. This comes ahead of the ECB meeting tomorrow, which could be one of the less eventful gatherings after the central bank last month laid out plans for the end of quantitative easing this year and made clear that interest rates will not start to rise until at least the middle of next year. Nothing that has happened since is likely to have changed this view.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Live FX Market Analysis – 24 July 2018

In this week’s FX webinar, Senior Market Analyst Craig Erlam discusses the latest events that are moving financial markets – Trump attacks the Fed, Brexit plans widely criticized etc – and previews the week ahead.

Craig also gives his live analysis on EURUSD (9:22), GBPUSD (11:48), EURGBP (18:45), AUDUSD (19:34), USDCAD (21:04), GBPCAD (22:14), NZDUSD (23:31), USDJPY (24:38), GBPJPY (27:41) and EURJPY (29:09).

Markets get busy week off to weaker start

Trump $500 billion Chinese tariffs threat weighs on sentiment

Equity markets are trading slightly in the red at the start of the week, a reflection of the slightly risk averse tone stemming from the prospect of the trade conflict escalating in the coming months.

US President Donald Trump has continued to double down on threats against China, warning he is willing to impose tariffs on all goods imports which equates to around $500 billion. While this isn’t the first time he’s suggested this, it does seem he is becoming increasingly frustrated with the process and that he is not getting the results he expected when he first started down this path.

Unless the two countries find a solution in the next couple of months, the next $200 billion of 10% tariffs that were revealed recently will likely be imposed which could be met with similar measures on the US, if previous actions and rhetoric are anything to go by. While the market rally has stalled this year, with trade being a major contributor, they have shown a certain resilience, something that may not last once tariffs start to take their toll on the economy, with price increases for consumers sure to have an impact.

DAX under pressure after Trump threatens currency war

Earnings eyed but trade could once again be key

This week is likely to see focus remain on trade, with Trump not one to take a back seat and remove himself from the spotlight. Earnings season could provide a welcome distraction from the political theatre of trade wars but even here it’s going to feature as tariffs will have an impact on the outlooks of a number of companies and investors will be keen to hear their views. Around a third of S&P 500 companies report on the second quarter, including three of the four FANG stocks which will typically attract plenty of attention.

There are also a number of other events to focus on this week including the ECB meeting on Thursday – although this may be more of a low key affair with the central bank having already laid out plans for the next year. Theresa May will also meet with her cabinet on Monday for their final meeting before the summer recess, in which the Brexit white paper may be discussed, given the widespread opposition to it and apparent rejection of aspects of it by the European Union chief negotiator Michel Barnier. Needless to say, with only months to go until exit day, negotiations are not progressing as hoped.

Trade and currency wars a market threat

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

OANDA Market Insights podcast (episode 24)

OANDA Senior Market Analyst Craig Erlam reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: Trump attacks Fed over rate rise, UK inflation figures hit sterling, Barnier dismisses Brexit white paper , Google fined record sum.

USD Weaker After Trump Interest Rate Comments

Canada: Inflation Hit Six-Year-Plus High

Dollar Rally Ends With Trump Monetary Policy and Currency War Comments

 

BoE hike still priced in despite worrying UK data

GBP bounces back after data driven selling

European markets are trading in the red early in the session on Thursday, with the FTSE 100 the only major index in the green, supported by weakness in the pound after the release of some more disappointing data for the UK.

The UK retail sales data this morning may have dealt another major blow to the Bank of England’s hopes of raising interest rates in August, bringing an end to what has likely been a very frustrating week for policy makers. In recent weeks it has appeared that the Monetary Policy Committee had once again come around to the idea that raising interest rates in August is appropriate after plans in May were derailed by a frustratingly weak first quarter, something policy makers appeared to have correctly assumed would prove to be a temporary lull.

The data this week may have thrown another spanner in the works, with labour market figures showing a tight labour market by uninspiring wage growth, core inflation falling below 2% and now modest retail sales growth in what was expected to be a stellar month. This is clearly not the platform policy makers were hoping for when preparing investors for a rate hike but they may still seize the opportunity before it’s taken away from them for a prolonged period.

DAX takes pause from recent gains

Traders still convinced of rate hike despite week of bad releases

There may well be a strong feeling in the MPC that the central bank should have pushed ahead with a hike in May and stood by its belief that weather had a negative but temporary impact on the economy which would have given it the freedom to be patient through the rest of the year. Instead, it now finds itself in a position were the most recent data hasn’t been great and Brexit talks are not progressing as hoped, meaning it would make far more sense to hold off until November, something that would likely result in another backlash against the policy of forward guidance.

UK Interest Rate Probability

Source – Thomson Reuters Eikon

While holding off would make sense, there is clearly a view in the markets that this will not happen and the central bank may stick to plans to hike in two weeks. Despite numerous setbacks this week, a hike is still currently 68% priced in and after initial selling, the pound is showing some resilience and holding above 1.30 against the dollar. It seems traders are awaiting any hint from the BoE that plans have been put on hold again, at which point the resilience will likely break and possibly aggressively.

GBPUSD Daily Chart

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US earnings, data and Fed speakers eyed

Over in the US, futures are tracking the majority of Europe lower, with the major indices currently seen opening around a tenth of one percent lower. This comes after Federal Reserve Chair Jerome Powell once again gave an upbeat assessment of the economy on Wednesday, in his appearance in front of the House Financial Services Committee. With the Fed on a quite clear and consistent course on interest rates, there wasn’t a huge amount learned in either appearance that we already didn’t know.

‘Footy’ dented U.K retail sales and pounds sterling

Today it’s looking a little quiet for the US. There are a couple of pieces of data that traders will be looking out for ahead of the open – Philly Fed manufacturing index and jobless claims – and we’ll also hear from Powell’s colleague at the Fed, Randal Quarles. With the season now up and running, there’ll also be a big focus on US earnings with 21 companies reporting including Microsoft and BNY Mellon.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Is BoE Rate Hike in Doubt After Inflation Data?

GBP slides as core inflation falls below BoE target

Focus is back on the central banks on Wednesday as we await the second appearance this week of Federal Reserve Chair Jerome Powell and the Bank of England’s interest rate plans are questioned following some softer inflation numbers.

The pound is tumbling again on Wednesday after the latest inflation data for the UK threw a spanner in the works ahead of the BoE meeting in two weeks. There was a growing belief that the central bank will raise interest rates at the August meeting – rightly or wrongly – with the data this week seen providing additional support for such a move but the numbers we’ve seen this morning have done quite the opposite.

GBPUSD Daily Chart

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Earlier this year when policy makers were preparing a May hike, inflation was much higher and was seen as being a key reason behind the desire to raise rates. Had that number ticked higher again today, as was expected, it would – along with the other data we’ve seen recently – have provided policy makers an opportunity to follow through on previous plans without coming under too much scrutiny.

Fed Powell advances the dollar

With that not happening and core CPI falling to 1.9%, below the central bank’s 2% target, the decision becomes that much more difficult and uncertain. Moreover, the timing of the meeting is not ideal, with Brexit talks not going smoothly and only a few months in which they need to be concluded. Ordinarily, it would make much more sense for the Monetary Policy Committee to wait until November when much more clarity will exist over the economy and Brexit, but I’m not sure they will and market pricing appears to currently support this view.

UK Inflation

August rate hike still well priced in

An August rate hike is still 72% priced in, down from 77% yesterday, despite this morning’s release, which suggests investors do not believe policy makers will be deterred. The BoE’s credibility has long be brought into question, most recently in May when after months of hinting at a rate hike, it changed its mind due to first quarter weakness which it believed was transitory.

UK Interest Rate Probability

Source – Thomson Reuters Eikon

If it holds off again in two weeks despite the bounce back in the economy, people will seriously question whether any attention at all should be paid to the central banks forward guidance. For this reason, I think they will raise rates and hope they won’t be forced to reverse course in the near future, say if Brexit talks collapse.

Powell speech may offer little new information on interest rates

Attention will now turn to Powell’s testimony on the semi-annual monetary policy report in front of the House Financial Services Committee, where the Fed Chair is once again expected to deliver a very upbeat assessment of the economy and stick to previous views on rate hikes. The Fed has become one of the less interesting central banks due to its reliability and transparency – something that is very much a goal of all central banks – which is likely to make today’s appearance less of a market moving event.

USD/JPY advances to six month high post-testimony

That’s not to say that it doesn’t have the potential to cause market swings, rather that what Powell will say will likely already be priced in and so any movements are less likely to be significant. He may surprise us, should he get into a deeper discussion on trade wars for example and the implications for monetary policy, but as yet this is not something that has had an impact on the outlook.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Markets higher as earnings season gets underway

Earnings season eyed as trade war fears remain

We’re seeing some risk appetite return on Friday even as concerns about trade remain front and centre and shows no signs of improving.

European equity markets are trading in the green on Friday, taking the lead from the US session on Thursday where tech stocks drove a rally that saw the NASDAQ hit a record high. With earnings season getting underway, investors will be looking for reasons to be more optimistic having spent months reading about the risks that a trade war poses to the economy.

JP Morgan, Citigroup and Wells Fargo will kick things off today and over the coming weeks, investors will be paying close attention not just to the results but also references to trade tariffs and the impact they are expected to have on future results, particularly those that have already been targeted in counter-measures taken or proposed against the US.

DAX steady as investors search for cues

Sterling slips as Trump warns of risks to US/UK trade deal

Trump has very much been in the spotlight this week, attending the NATO summit in Brussels before heading over to the UK to meet Prime Minister Theresa May. As ever, Trump was not afraid to express his views on the UK and Brexit ahead of the visit, warning that a trade deal with the US would not be possible under the model that May is seeking with the European Union, while also expressing his belief that Boris Johnson would make a good PM. This appears to have weighed on the pound in trade on Friday given the complications it could cause May and her team.

None of this will go down well with May – who has previously pushed strongly for this visit despite much protest – and comes at a terrible time for her but as Trump well knows, she is in a very weak position right now and is unlikely to fight back and, more importantly, he wants a Brexit that best suits the US. Whether Trump’s comments give more voice to dissenters among Brexiteers is yet to be seen but it certainly doesn’t help the PM as a trade deal with the US has long been touted as one of the benefits of leaving the EU.

First signs of tariffs impact in China’s June trade numbers

Chinese trade surplus increases as Trump plans more tariffs

Chinese trade data released overnight may be used as a source for Trump’s next attack on the world’s second largest economy, with exports having soared once again – rising 11.3% – increasing the surplus the country has with the US to $41.61 billion in June. While the main reason for such a spike is likely to be exporters front loading sales ahead of the tariffs being implemented, it’s likely that a stronger US economy and weaker yuan is also playing a role.

I expect this will be used as another example of the bad trade policies that Trump has repeatedly references but been unable to so far influence. Trump is attempting to force them back to the table with threats of another $200 billion in tariffs, something that has so far only been met with retaliation from China and others.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

US Inflation Eyed as Markets Pare Losses

Markets higher after tariff-related losses

It’s been a more positive start to trade on Thursday, with equity markets in the green and paring Wednesday’s losses as investors continue to weigh up what impact the latest trade tariffs will have on the global economy.

While markets have typically reacted negatively to any escalation on trade, the overall impact has been relatively modest under the circumstances which suggests investors are far from panic mode right now. Many agree that tariffs will ultimately be bad for the global economy and therefore markets but there still seems to be some hope that common sense will prevail and a full blown trade war will be averted.

With Donald Trump now pursuing another $200 billion in tariffs against China though, we may have to wait a while as he is not easing up and China – and others – is determined to prove it will not be bullied into submission. Perhaps if the economy starts to suffer or the Republicans do badly in the midterms in November Trump will be forced to consider an alternative approach.

Equities shrug off trade tariff tensions

US inflation seen rising further

As it stands though, the economy is doing very well – aided by last year’s tax reforms – and the Federal Reserve is on course to raise interest rates twice more this year, having increased them on two occasions already. The central bank is clearly more concerned about the economy overheating right now than the prospect of a trade war – although this is also on their radar – and the inflation data we’ve seen very much justifies their view.

While CPI is not the Fed’s preferred measure of inflation, it does provide valuable insight and is typically released a couple of weeks before the core PCE price index. Today’s release is expected to show prices rising by 2.9% in June compared to a year earlier, with core inflation having risen by 2.3%, above the Fed’s 2% target. The core PCE price index may be a little behind this at 2% but this is at target and on the rise. Any unexpected increase today may suggest a similar rise is on the cards for the PCE numbers as well.

(Update 1) A tenuous and unstable state of affairs

ECB minutes eyed after dovish tightening last month

The minutes from the most recent European Central Bank meeting will also be released today. The ECB confirmed at the last meeting that it will end its quantitative easing program at the end of the year and won’t raise interest rates until at least the middle of 2019, which was largely in line with expectations. The dovish spin that was put on it though weighed on the euro at the time and it will be interesting to see whether the minutes have a similar impact.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Live FX Market Analysis – 10 July 2018 (Video)

In this week’s webinar, Senior Market Analyst Craig Erlam discussed the latest Brexit developments as two members of her team resign after an apparently united and productive meeting on Friday. He also talks Trump, after the latest imposition of trade tariffs and ahead of his trip to the UK and the NATO summit, and previews the week ahead.

Craig also gives his live analysis on EURUSD (12:20), GBPUSD (15:03), EURGBP (17:50), AUDUSD (19:35), USDCAD (24:12), GBPCAD (26:19), NZDUSD (28:31), USDJPY (30:22), GBPJPY (32:25) and EURJPY (34:52).

GBP/USD – British pound steady on modest GDP growth

USD/JPY – Japanese yen dips to 7-week low, inflation reports next

Commodities Weekly: Gold saved by dollar’s retracement