Draghi’s Dovish Surprise

Dovish policy measures from the ECB send the euro falling to its lowest levels since June 2017 ahead of today’s US labour market figures

Previous Day's Market Highlights

The European Central Bank (ECB) dealt markets a dovish surprise on Thursday, sending the euro tumbling to its lowest levels against the dollar since June 2017. While interest rates were kept on hold, as expected, the ECB struck a dovish tone by altering their forward guidance and sharply downgrading their economic forecasts. Firstly, the ECB altered their forward guidance to indicate that interest rates would remain at their current level “through the end of 2019”, rather than the previous guidance of “summer 2019”. In addition, both GDP growth and HICP inflation expectations were revised lower for all 3 years of the projections’ horizon, with inflation not expected to be near the 2% target even by 2021. Both measures, in addition to the roll out of further cheap funding for eurozone banks, pared back investors’ expectations for interest rate rises and sparked further concerns over the health of the eurozone economy. At the end of London trading, the euro was 0.8% lower against the dollar, its biggest one day fall since the start of the year.

Elsewhere, there was little for investors to digest. The pound struggled across the board, losing around 0.5% against most other G10 currencies as the lack of a breakthrough in Brexit negotiations weighed ahead of next week’s 2nd meaningful vote in Parliament. In contrast, the US dollar continued its recent strong performance, gaining 0.6% over the day, ahead of today’s labour market report. The Japanese yen also rallied, adding around 0.2%, as investors bought the safe-haven currency amid concerns over european growth. 

Away from FX, european equity markets closed lower, dragged down by the ECB’s cautious policy stance. The pan-European Stoxx 600 index ended the day down 0.6%. In the US, markets lost ground for a fourth consecutive session, with the S&P 500 losing 0.8%. Finally, oil prices recorded modest gains, with Brent adding 0.4%, despite concerns that an economic slowdown would lead to lower demand.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1677 1.1724 1.1312 3.51%
GBP/USD 1.3090 1.3350 1.2773 4.32%
EUR/USD 1.1208 1.1419 1.1176 2.13%
GBP/AUD 1.8683 1.8775 1.7990 4.18%
GBP/NZD 1.9357 1.9542 1.8660 4.51%
GBP/CAD 1.7609 1.7723 1.6973 4.23%

Today's Market Highlights

Today's main focus will be the monthly US labour market report, including the headline nonfarm payrolls figure. Expectations are for payrolls to have increased by around 180,000 - short of last month's figure and slightly below the 3-month average, but more in line with trend. A keen eye will also be paid to any revisions to last month's bumper 304,000 reading. Focus will also be on wage growth, with average earnings set to increase at 3.3% on a year-over-year basis as well as the unemployment rate, expected to tick down to 3.9%. Both of the latter two measures will be keenly watched by the Federal Reserve as they try to judge the degree of slack remaining in the labour market.

Elsewhere, the economic calendar is devoid of any major releases from the UK or the eurozone. Attention is therefore likely to remain fixed on Brexit for the pound, while market participants will likely continue to digest yesterday's dovish ECB. The North American calendar is slightly busier, with labour market figures from Canada set to be released at the same time as the US. Expectations are for unemployment to hold steady at 5.8%, while the net employment change is forecast at 0. Such data is unlikely to give the Bank of Canada much reason to move away from its neutral policy stance. Housing starts and business permits figures will also be released from the US.

Looking ahead to next week, all attention for sterling will be on political developments leading up to and after the second meaningful vote on the Brexit Withdrawal Agreement. Sterling is likely to appreciate further if Parliament vote in favour of extending Article 50 or if the Withdrawal Agreement is approved by the Commons, though the latter remains unlikely. Other releases of note include CPI inflation from the US, GDP figures from the UK and the results of the Bank of Japan's latest monetary policy meeting.

Today's Economic Calendar

Time Currency Release Consensus Previous
13:30 USD Nonfarm Payrolls 180k 304k
13:30 USD Average Hourly Earnings (y/y) 3.3% 3.2%
13:30 USD Unemployment Rate 3.9% 4.0%
13:30 CAD Net Change in Employment 0.0k 66.8k
13:30 CAD Unemployment Rate 5.8% 5.8%