Draghi & Co. Take Centre Stage

The dollar whipsaws as dovish Fed comments continue ahead of today's ECB monetary policy decision.

Previous Day's Market Highlights

The dollar experienced a tug-of-war yesterday between the competing forces of an upbeat non-manufacturing PMI release, poorer than expected ADP employment change figures and continued dovish rhetoric from Federal Reserve policymakers. Data from ISM showed the non-manufacturing sector expanded at its fastest pace in 3 months in May, with the PMI rising to an above-forecast 56.9. This data shows clear divergence from the manufacturing sector, which slid to its slowest pace of expansion since October 2016, showing the services sector underpinning US economic growth. However, not all US releases painted a rosy picture yesterday, with the ADP employment change showing the lowest jobs gain since March 2010, with just 27,000 jobs added to the US economy last month according to the gauge. While the correlation with Friday’s official nonfarm payrolls figure is doubtful, it appears to be a case of a lack of available labour to fill job openings in the US, rather than openings not being available. This should result in upward pressure on wages going forward, a point which Friday’s data should confirm. 
Turning to the Fed, a couple of policymakers reaffirmed that the Fed would be prepared to make adjustments to policy, adding more accommodation if necessary, in order to sustain economic expansion. Due to the continued dovish comments, markets now price a 75% chance of a rate cut as soon as July, compared to 65% yesterday. For the dollar, these competing forces resulted in a choppy session, with the dollar index recovering after hitting a 2-month low to finish the day 0.2% higher. 
Meanwhile, in Europe, services PMIs were also the main order of business. From the eurozone, data showed the services industry expanding faster than expected, the PMI rising to 52.9. However, the single currency failed to benefit from the upbeat data, falling 0.2% over the course of the day, recording a first daily loss against the dollar in 4 days. For the pound, markets largely shrugged off a 2nd consecutive month of expansion in the services sector. Sterling did remain relatively well supported, however did not rally significantly due to market participants remaining cautious over the political situation in the UK. Wednesday’s major mover was the kiwi dollar, which gained 0.4% after relatively hawkish comments from an RBNZ policymaker, stating that rates may be kept at their current levels for some time. This contrasts with the current market view, with further policy easing priced in. Other dollar-bloc currencies, the Aussie and Canadian dollars, remained largely within familiar ranges, the latter losing some ground due to the slide in oil prices. 
Away from FX, equity markets continued to gain as market participants bet on looser monetary policy from the Federal Reserve. The pan-European Stoxx 600 chalked up a gain of 0.3%, while the US S&P 500 recorded back-to-back daily gains, adding just over 0.8%. In contrast, oil prices declined steeply after an unexpected surge in US stockpiles. Global benchmark Brent declined 2.1%, falling under the key $60bbl mark for the first time since mid-Jaunary. Meanwhile, US WTI crude fell more than 3% to a 5-month low. 

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1290 1.1632 1.1232 3.44%
GBP/USD 1.2680 1.3041 1.2558 3.70%
EUR/USD 1.1230 1.1307 1.1107 1.77%
GBP/AUD 1.8185 1.8716 1.8117 3.20%
GBP/NZD 1.9130 1.9799 1.9109 3.49%
GBP/CAD 1.7010 1.7519 1.6902 3.52%

Today's Market Highlights

The European Central Bank (ECB) take centre stage today, with their latest monetary policy announcement due this afternoon. Markets expect no change to interest rates, with forward guidance also likely to maintain that rates will be kept at their current levels at least until the end of 2019. However, there will be plenty to chew over. Firstly, markets will be looking to the ECB’s latest growth and inflation projections to gauge policymakers expectations for the eurozone economy - particularly the bloc’s ability to recover from a better-than-expected, but still soft, start to the year. Other points of interest include a possible discussion on tiering the negative deposit rate, a measure designed to mitigate the impact of negative rates on eurozone banks. Such a measure will likely have been discussed, but there is currently little monetary policy case to implement it. In addition, the terms of TLTRO-III, the ECB’s latest package of cheap, long-term bank financing loans, may be revealed. Should such a package be priced at an attractive interest rate, this would be seen as a method of stimulating the eurozone economy rather than a package purely to provide banks with a liquidity backstop. Overall, with the eurozone economy remaining sluggish, and inflation expectations close to an all-time low, policymakers may strike a more dovish tone than expected, posing a downside risk to the euro. 
Elsewhere, final first quarter GDP figures from the eurozone are due, though are unlikely to be a significant source of volatility unless differing significantly from the previous 2 estimates of 0.4% quarter-on-quarter expansion. Meanwhile, the UK economic calendar is devoid of major releases, ensuring sterling should remain relatively rangebound. Across the pond, a number of second tier releases are due from the US. Of most interest to markets will be the initial jobless claims figure, expected at 215,000, the final piece of the labour market puzzle received before tomorrow’s nonfarm payrolls figure. Other notable releases include April’s trade balance figures and labour productivity for the first quarter - though neither should cause significant volatility. From Canada, markets will look to this afternoon’s Ivey PMI figure as a leading indicator of economic performance after a disappointing 1st quarter. 
Finally, a few central bank speakers are due today, with most attention likely to focus on BoE Governor Carney’s speech this morning. After striking a relatively hawkish tone at the BoE’s last rate decision, markets will be looking for similar hints should any comments on monetary policy be made. This afternoon, investors hear from the Fed’s Kaplan and Williams, expecting the message of accommodation if necessary to be repeated.

Today's Economic Calendar

Time Currency Release Consensus Previous
10:00am EUR Final GDP (q/q - Q1) 0.4% 0.4%
10:00am EUR Final GDP (y/y - Q1) 1.2% 1.2%
12:45pm EUR ECB Interest Rate Decision 0.0% 0.0%
1:30pm EUR ECB Monetary Policy Statement & Press Conference
1:30pm USD Weekly Jobless Claims 215k 215k
3:00pm CAD Ivey PMI (May) 53.0 55.9