Daily Brief

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A big day for the ECB and the euro

Pound rises on hopes of averting no deal Brexit

The pound made slight gains against the euro yesterday and for once, Brexit wasn’t the key factor in the move. Data from Europe showed that July’s year-on-year industrial output from Spain fell from 1.6% to 0.8%. This was below forecast and contributed to an even more subdued euro as investors await the outcome of the European Central Bank meeting today. However, the influence of Brexit was not far away; the pound didn’t react to an ONS release which showed that average wages, with bonuses included, grew 4.0% in July, well ahead of market expectations for a reading of 3.7%. Traditional ecostats have been playing second fiddle to Brexit when it comes to influencing the pound in recent months but with Parliament suspended, investors may start looking closer at the numbers in the future.

Brexit concerns are never far away, but the market appears to be considering a diminished likelihood of a no-deal Brexit. Deputy Labour leader Tom Watson called for his party to campaign to remain in the EU and suggested a second referendum. While it may have no immediate effect, it suggests a change in approach that may reflect a move away from the worst-case scenarios of a no-deal Brexit published yesterday. German Chancellor Angela Merkel also added to the cautious optimism, stating that, "We still have every chance of getting an orderly (Brexit) and the German government will do everything it can to make that possible - right up to the last day.” She also added the caveat, “But I also say we are prepared for a disorderly Brexit." As a result of this and factors pressuring currencies elsewhere, sterling made modest gains against the euro, US dollar and a basket of other currencies.

ECB announcement at lunchtime

All this week, the market has been awaiting the results of the ECB meeting today and investors have been tentative which has led to a subdued euro. The expectation is that a significant stimulus programme will be announced today, but the question of how extensive the fiscal stimulus measures will be. If the programme is more extensive than expected, the euro may lose out because even the prospect of changes has put the single currency on the defensive. 

ECB President Mario Draghi is set to announce the latest interest rate decision and monetary policy outlook at 12.30GMT and the investors are braced for a reaction. A slowdown across the Eurozone has meant that the ECB is under pressure to take action, but there are still divided views on exactly what that approach should be. Some ECB members, such as Finnish central banker Olli Rehn are calling for an aggressive fiscal stimulus package but others appear more cautious. 

New round of trade talks helps the greenback

The US dollar made some gains as hopes rose of progress in the trade talks between the US and China. The de-escalation included a list of tariff exemptions published by China which were taken as a positive sign for the talks scheduled in October. The US Bureau of Labor Statistics announced that the Producer Price Index (PPI) for final demand rose 0.1% in August, less than the 0.2% in July. There was also a rise in US Treasury yields and US equities which gave the dollar some assistance. However, the numbers did nothing to alter expectations that the Federal Reserve will cut interest rates new week.

RBA rules out QE

Alongside the positive sentiment caused by progress in the US-China trade talks, the Australian dollar had more assistance when the Reserve Bank of Australia (RBA) reiterated that a quantitative easing (QE) programme was unlikely to be needed. Their current approach is to maintain the current cash rate of 1% to support the economy. A rebound in Asian equity markets also helped AUD/USD reach a six-week high of 0.6885.

While the Australian dollar is less likely than other currencies to react to the ECB decision, it may be impacted by the knock-on effect on the euro, US dollar and sterling. In addition, there are a raft of statistics being announced today. The New Zealand food price index and the Japanese core goods price and machinery orders may have an influence. Other ecostats due today include the UK RICS housing price balance, German, French and US CPI measures and the US Federal budget. Although the ECB will be the most closely watched announcement today, there are a range of factors which may cause some volatility today.

GBP: Gains made against subdued euro

GBP: Gains made against subdued euro

EUR: Market awaits ECB decision

EUR: Market awaits ECB decision

USD: Easing of trade war tensions helps the dollar

USD: Easing of trade war tensions helps the dollar

AUD: RBA gives Aussie a further boost

AUD: RBA gives Aussie a further boost

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