Release the Doves

The global monetary policy U-turn continues as Draghi’s dovish comments drag the euro lower - with the FOMC set to nod towards looser policy tonight.

Previous Day's Market Highlights

ECB President Mario Draghi could hardly have sounded more dovish if he’d tried on Tuesday, striking a downbeat tone and leaving the door to policy easing wide open by stating that ‘additional stimulus will be required’ if the economic outlook for the eurozone doesn’t improve. An improvement currently appears unlikely, especially with Draghi himself commenting that indicators for the coming quarters point to lingering economic softness - a fact that further heightens the chances of the ECB having to alter policy before Draghi’s term ends in October. The ECB’s preferred move to stimulate the economy, according to Bloomberg reports, is likely to come in the form of a further cut to the negative deposit rate, with markets now pricing in 10bps worth of rate cuts by the ECB in September. This is a significant repricing of expectations, and is representative of the global monetary policy U-turn which has taken place. Alternative stimulus methods include revising forward guidance or restarting quantitive easing - which according to Draghi has “considerable headroom”. A combination of all 3 policies is the most likely outcome, possibly as soon as September should downside risks to the economy prevail. 
 
Draghi’s dovish comments dragged the euro to a 2-week low against the dollar, below the $1.12 handle, with the single currency closing down by 0.35%. The euro was not helped by a couple of below forecast data releases, with ZEW economic sentiment surveys from the euro area and Germany falling to 6- and 8-month lows respectively. Final CPI figures for May were also released, though showed no change from the previous flash estimates of 1.2% YoY (headline) and 0.8% YoY (core). 
 
Elsewhere, the pound recorded a modest gain after yesterday’s steep fall, though remained close to 6-month lows. No notable UK data was released on Tuesday, though the results of the 2nd round of voting in the Conservative Party leadership contest showed no-deal Brexit advocate Dominic Raab being eliminated - Boris Johnson remains the favourite, with 80 more votes from MPs than his nearest challenger. The pound ended the day 0.2% higher against the dollar, while sterling gained 0.4% against the euro as a result of the single currency’s broad-based weakness. 
 
The dollar also strengthened, recording a 5th consecutive daily gain against a basket of peers, as the FOMC’s 2-day policy meeting began. The greenback largely shrugged off as-forecast building permits and housing starts figures, in addition to a number of tweets from President Trump on a wide variety of subjects from ECB policy to US-China trade. Instead, market participants’ attention was firmly fixed on the Fed’s imminent policy decision. Meanwhile, commodity currencies also gained. The Canadian dollar added 0.2% as oil prices firmed, while the Aussie and Kiwi dollars added 0.3% and 0.5% respectively as risk appetite improved following reports President Trump will meet Chinese President Xi at the G-20 Summit next weekend. 
 
Away from FX, equity markets gained, with increased hopes of a US-China trade deal and the prospects of looser monetary policy fuelling the rally. In Europe, the pan-continental Stoxx 600 added 1.8%, while the US benchmark S&P 500 gained 1.1% ahead of tomorrow’s FOMC meeting. Finally, as mentioned, oil prices also firmed, with both trade deal hopes and supply concerns supporting prices. Benchmark Brent added 1.65%, while US WTI crude gained 3.3%. 

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1210 1.1376 1.1141 2.07%
GBP/USD 1.2550 1.2763 1.2506 2.01%
EUR/USD 1.1195 1.1348 1.1107 2.12%
GBP/AUD 1.8245 1.8421 1.8113 1.67%
GBP/NZD 1.9215 1.9513 1.9053 2.36%
GBP/CAD 1.6780 1.7135 1.6755 2.22%

Today's Market Highlights

After a dovish message from ECB President Draghi on Tuesday, focus today shifts to the Federal Reserve and whether Chair Powell will ‘out-dove’ Draghi. The FOMC’s latest monetary policy decision is due at 7pm this evening and, while no change to interest rates is expected, the meeting will be anything but a non-event. Markets will be looking for the Fed to show an openness to more accommodative monetary policy in light of continued benign inflation, which can no longer reasonably be described as ‘transitory’, and escalating US-China trade tensions. The Fed are likely to show a bias towards policy easing either by altering the monetary policy statement - likely using language similar to Chair Powell’s recent “act as appropriate” comments - or through the dot plot (which shows individual policymakers’ expectations of future interest rates) being revised lower. Both will be of significant interest to markets which currently price in 75bps of rate cuts this year, with a July cut a 90% chance. Also of interest will be the FOMC’s latest economic projections, likely to show downward revisions to both GDP growth and inflation, in addition to any comments from Chair Powell at the post-decision press conference. For the markets, a dovish statement, leaving the door open to policy easing, would likely be met with a weaker dollar and a rally in equity markets. However, if the Fed maintain their current stance of ‘patience’ when determining policy shifts, a market tantrum may ensue - with the dollar rallying and equities and Treasuries sinking. Risks appear tilted to the upside for the dollar, with the FOMC having to indicate significant policy easing in order to match markets’ current interest rate pricing. 
 
Before getting to the FOMC policy decision, markets will have a host of other economic releases and events to digest. From the UK, CPI inflation figures will be eyed. Expectations are for CPI to have increased at 2% on a year-on-year basis last month, a slight dip from the previous level, though in line with the BoE’s inflation target. However, the core CPI figure, which strips out the impact of volatile food and energy prices, is expected to soften to 1.7%, the slowest pace of price increases since January 2017. Meanwhile, there will be no escape from the Westminster political bubble for sterling, with the 3rd ballot of MPs due to be held this evening in the ongoing Conservative Party leadership contest.
 
Elsewhere, markets will also eye CPI inflation figures from Canada, expected to have increased at 2.1% on a year-on-year basis last month, the fastest pace of price increases since October 2018. However, the expected increase in headline inflation is likely to be outweighed by a sluggish core CPI figure, expected at just 1.2% YoY, the slowest pace in almost 18 months. The inflation measures, if in line with expectations, are unlikely to significantly alter the BoC’s monetary policy stance, with rates set to remain unchanged for the remainder of the year. There are no tier 1 data releases due from the eurozone today, however ECB President Draghi is once again due to speak. Any monetary policy comments are likely to be broadly in line with yesterday’s dovish message.
 
Overnight, the economic calendar remains busy. Firstly, 1st quarter GDP figures are due from New Zealand, expected to show growth remaining at a slightly below-trend level of 0.6% on a quarter-on-quarter basis, unchanged from the final quarter of 2018. Year-on-year growth is also expected to remain similar to Q4 2018 at 2.4% on a year-on-year basis. Also overnight, the Bank of Japan (BoJ) release their latest monetary policy decision. No change to rates is expected as, despite a better than expected 1st quarter, the Japanese economy remains fragile, with downside risks prevailing – namely in the shape of escalating trade tensions. Therefore, the BoJ are likely to strike a relatively cautious tone, though questions persist over policymakers’ ability to stimulate the economy with a limited policy toolbox.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:30am GBP CPI (y/y - May) 2.0% 2.1%
9:30am GBP Core CPI (y/y - May) 1.7% 1.8%
1:30pm CAD CPI (y/y - May) 2.1% 2.0%
1:30pm CAD Core CPI (y/y - May) 1.2% 1.5%
7:00pm USD Federal Reserve Interest Rate Decision 2.25% - 2.5% 2.25% - 2.5%
7:00pm USD Federal Reserve Monetary Policy Statement & Economic Projections
7:30pm USD Fed Chair Powell Press Conference
11:45pm NZD GDP (q/q - Q1) 0.6% 0.6%