Draghi & Co. Prepare for Action

The euro whipsaws as Draghi prepares for a stimulus package in September, while today’s focus will be on US Q2 GDP ahead of next week’s FOMC decision.

Previous Day's Market Highlights

The ECB seemingly struck as dovish a tone as is possible to do so without taking policy steps on Thursday, giving clear signs that not just deposit rate cuts, but a bigger package of stimulus measures, is on the way in September. Policymakers left rates unchanged - however, in line with my base case, dovishly revised their forward guidance, indicating that 'rates will remain at present levels, or lower, at least through the first half of 2020'; while also emphasising that the Governing Council remain 'determined to act' to ensure inflation returns to target. The dovishness continued, with ECB policymakers tasking committees to examine reinforcing forward guidance, a tiering system for the deposit rate as well as investigating options for restarting asset purchases - all possible stimulus measures to be introduced in September. The euro fell immediately after the policy announcement, briefly falling to a more than 2-year low against the dollar at $1.11, before reversing course to settle unchanged after President Draghi's less dovish press conference. While Draghi flagged concerns over the economic outlook, bluntly stating that it is getting 'worse and worse', comments that no discussion over an immediate interest rate cut had taken place helped to support the single currency. Despite the press conference, the bottom line is that the ECB have clearly teed up September as the time to announce a significant stimulus package, including a deposit rate cut, tiering measures to mitigate the impact on banks an a possible restart of asset purchases. President Draghi's time for talking is over, the ECB now have to walk the walk in 7 weeks time. 

Elsewhere, the pound struggled as political concerns continued to weigh, with markets digesting Prime Minister Johnson's appointment of a heavily pro-Brexit cabinet. Also exerting pressure on the pound were comments from the EU's Chief Brexit Negotiator Barnier, who stated that Boris Johnson's plan to abolish the Irish backstop was "unacceptable". Sterling ended the day around 0.3% lower against the dollar and euro, pulling back from a 1-month high against the latter after the ECB policy decision.

In contrast to sterling, the dollar gained ground, adding just under 0.2% against a basket of peers after a number of better than expected data releases. Figures showed durable goods orders, a useful leading indicator for production, increased by 2% in June - well above the 0.7% forecast and the fastest pace since August 2018. Furthermore, the less-volatile core figure, which excludes defence and aircraft orders, increased by 1.9% MoM, also smashing expectations. Added to this were weekly jobless claims, which fell to their lowest level since early-April at 209,000. The dollar's strength resulted in weakness elsewhere in G10 FX, with all other majors losing ground. The day's worst performer was the kiwi dollar, shedding just under 0.7% as the risk barometer followed equity markets lower. 

Away from FX, equities on both sides of the Atlantic lost ground as market participants began to bet on a less aggressive path of monetary policy easing from the Fed. The pan-European Stoxx 600 closed 0.4% lower, while the US benchmark S&P 500 shed 0.55%. Finally, oil prices settled with modest gains with a fall in US stockpiles helping to support prices. Global benchmark Brent settled 0.3% higher, while US WTI crude added 0.25%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1150 1.1246 1.1048 1.76%
GBP/USD 1.2430 1.2705 1.2381 2.55%
EUR/USD 1.1145 1.1371 1.1100 2.38%
GBP/AUD 1.7905 1.8172 1.7630 2.98%
GBP/NZD 1.8670 1.8960 1.8368 3.12%
GBP/CAD 1.6365 1.6642 1.6145 2.99%

Today's Market Highlights

The week concludes with a sparsely populated economic calendar, the only notable release the being key 1st, or advance, estimate of US 2nd quarter GDP. The release is set to show the US economy grew at 1.8% on an annualised QoQ basis - the slowest pace since the first quarter of 2017, and the first sub-2% print since President Trump took office. The data is likely to show President Trump's trade war with China significantly denting the economy, largely due a significant increase in stockpiling in the first quarter and a drop in business investment, the latter expected to decline for the 1st time since 2016. The GDP figure would be a lot worse but for resilient consumer spending, with upbeat consumers - despite lingering economic uncertainties - helping to underpin the expansion. Also due will be Q2's core PCE figures, one of the Fed's preferred inflation gauges, expected to show prices increasing at 2.0% on a quarter-on-quarter basis, though the YoY gauge next Tuesday will attract more attention. For the markets, an as expected or better than forecast release will likely have a relatively limited impact, while a softer than expected growth figure will likely see markets once again ratchet up their bets on aggressive policy easing from the Fed.

Elsewhere, there is nothing happening on either the data or monetary policy fronts. The pound is likely to remain relatively rangebound, a theme that may continue throughout August with Parliament having now begun their summer recess. Meanwhile, the euro will likely also be subdued, with market participants continuing to digest yesterday's ECB policy decision.

Looking ahead to next week, the Federal Reserve's latest monetary policy decision, due on Wednesday, will be the main highlight. The Fed are expected to cut rates for the first time in a decade, despite little data-driven reason to do so, as policymakers look to provide an 'insurance cut' to protect the US economy from the ongoing impact of trade-related uncertainties. A 25bps rate cut is fully priced in, and is my base case, hence focus will be on the Fed's likely future monetary policy path - whether this is a one-off rate cut, or the beginning of a policy easing cycle. Monetary policy decisions are also due from the Bank of Japan (BoJ) and Bank of England (BoE) next week. The BoJ's Tuesday meeting will likely see rates remain unchanged, with policymakers continuing to pledge further powerful monetary policy easing if necessary. The BoE are also likely to keep rates unchanged on Thursday, though the Bank's latest set of economic forecasts will be closely watched for the impact of political uncertainties.

On the data front, eurozone releases will be eyed with both July's CPI inflation figures and the 1st estimate of Q2 GDP due. Elsewhere, markets will examine inflation figures from Australia, the usual round of manufacturing PMI surveys from most major global economies, in addition to Friday's monthly US labour market report, including the headline nonfarm payrolls figure.

Today's Economic Calendar

Time Currency Release Consensus Previous
1:30pm USD Advance GDP (Annualised QoQ - Q2) 1.8% 3.1%
1:30pm USD Core PCE (QoQ - Q2) 2.0% 1.2%