ECB to hold rates but downgrade forecast
It has been a quiet week so far in terms of economic data and survey evidence from the Eurozone. That which has been released has indicated some overall improvement in economic conditions, albeit from the worst economic downturn recorded. Today’s ECB Governing Council meeting should conclude with no major changes to monetary policy, with both interest rates and the asset purchase programmes unchanged from the July decision.
Markets are anticipating this, and so may not move either way on the decision itself, but will be interested in any economic forecast changes. It is viewed likely that the inflation forecast will be revised lower, if only marginally. As for the growth forecast, the downturn may not be as severe as initially envisaged, but the recovery could well take longer. These should cement market opinion that the ECB is set to maintain its current ultra-loose stance, or even loosen further, over the next year to 18 months. In truth it could be much longer than that, dependent on the evolution of the pandemic and the response of the authorities. Yesterday’s euro bounce against the US dollar should be viewed as markets taking a breather, rather than re-establishing a new uptrend.
Pound dips then rises
Are concerns over the state of the UK/EU trade negotiations already priced into the pound? Sort of. It still looks as if the markets expect a basic free trade agreement to be reached, but they are less certain than they were. Yesterday’s whipsaw action in the pound saw it dropping in early trade, only for it to rebound. This was not for any UK economic or political reasons, however, but because of a more general recovery in risk appetite. That in turn looked unconvincing, more of a dead cat bounce than any real recovery.
Overnight we have had the RICS house price survey for August. The index rose to a balance of +44 of surveyors that saw prices rising, up from +13 in July. The sustainability of the rebound in the housing market remains in question. Can demand continue to hold up as joblessness rises and once the stamp duty holiday comes to an end? Some of the additional indicators suggest demand is dampening, with new buyer enquiries and sales expectations balance both down on July’s readings. Tomorrow sees UK monthly GDP figures for July. Here we are hoping to see if the rebound has been as impressive as in June, and whether these figures can help GBP turn the tide. The pound needs to make significant renewed gains against the euro and US dollar to offer such signals.
USD reverse, BoC edit, SARB rate cut?
US equity markets had a better day yesterday. That improvement in risk appetite prompted a sell-off in US Treasuries, which hurt the US dollar. Trends are never smooth, and the reversal in the dollar was somewhat predictable given the sizeable rally seen recently. Today’s US August producer prices data and jobless claims figures for the week concluding the 5th September will provide some fundamental focus for FX markets. However, the attention remains on risk appetite, and whether yesterday’s USD sell off was anything more than a pause for breath, after the frenetic buying activity seen in previous sessions?
The Bank of Canada left the overnight rate at 0.25% yesterday, as expected. In the accompanying statement, the BoC removed the language about being prepared to offer more stimulus if necessary. This was a nod towards some of the improved data seen recently, but also recognition that the BoC are already sizeable custodians of large chunks of Canadian government bonds. August housing starts data were stronger than expected, at an annualised rate of 262,000 versus 245,000 in July. The Canadian dollar rallied yesterday against USD, and it recovered less than half of the losses of the previous two sessions.
The financial markets may be preparing for a rate cut in South Africa. At the moment they are pricing in about a one in three chance of a cut at next week’s meeting. As previously mentioned, the GDP figures earlier this week were abysmal, showing output down over 12.5% in Q2. Headline and core inflation are towards the bottom end of the South African Reserve Bank’s 3-6% range, although off the lows seen in May. Given that it isn’t fully priced in, if the SARB do cut at next week’s meeting it could increase the pressure on the rand to depreciate.