Super Mario Prepares His Bazooka

G10 FX holds steady ahead of today’s ECB meeting, with Draghi & Co. set to unveil a sweeping stimulus package, and bring out the bond-buying bazooka.

Previous Day's Market Highlights

For a second consecutive day, volatility was muted across the majority of G10 FX on Wednesday, with markets continuing to strike a cautious tone ahead of today's ECB policy decision. In fact, the euro was the day's notable mover, with the common currency dipping by just over 0.4%; the move largely being due to positioning ahead of Draghi's policy announcement, but with further downgrades to German growth expectations from two leading research institutes also weighing. Nonetheless, the euro's slide stalled at the key $1.10 handle, with the support level holding firm. Wednesday's other major mover was the Canadian dollar, with the loonie shedding around 0.3%. A couple of factors exerted downward pressure, namely a slide in oil prices (detailed below) and the official announcement that federal elections would be held on 21st October, resulting in a degree of risk being priced in.

Elsewhere, the pound held steady, largely ignoring the Scottish High Court's ruling that the prorogation of Parliament is unlawful. Despite opposition MPs demands that Parliament return immediately, though a decision on cancelling the prorogation will only be taken on Tuesday, after an appeal is heard in the Supreme Court. This doesn't materially alter the outlook for the pound, though resumption of Parliamentary debate may create further uncertainty. On Wednesday, sterling dipped 0.25% against the dollar, while adding 0.15% against a weaker euro.

Across the pond, the dollar recorded its first daily gain this week, adding 0.3%, benefitting from weakness in other majors as well as a rise in bond yields across the curve. Better than expected PPI figures also helped the greenback, with data showing factory gate prices beginning to trend upwards. Headline PPI increased by 1.8% YoY last month, while the core measure increased by 2.3%, providing further evidence of mounting inflationary pressures in the US economy.

Away from FX, European equity markets gained ground, with the pan-continental Stoxx 600 closing 0.77% higher, as basic resources led the gains. US equity markets also rallied, the benchmark S&P 500 adding 0.72% to close above 3000 for the first time since July. Finally, oil prices resumed their decline, this time after reports President Trump had discussed easing sanctions on Iran. Global benchmark Brent settled 2.87% lower, while US WTI crude shed 2.52%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1190 1.1230 1.0880 3.12%
GBP/USD 1.2320 1.2385 1.1958 3.45%
EUR/USD 1.1010 1.1164 1.0926 2.13%
GBP/AUD 1.7910 1.8336 1.7792 2.97%
GBP/NZD 1.9145 1.9413 1.8826 3.02%
GBP/CAD 1.6255 1.6357 1.5956 2.45%

Today's Market Highlights

The time for talking is now over. At his penultimate policy meeting today, (Super) Mario Draghi is set to prepare his bazooka, and pull yet another monetary firework in an attempt to re-anchor eurozone inflation expectations, and turnaround the fortunes of the ailing eurozone economy. Below are my expectations for the policy decision:

  • Rate Cut - Policymakers will likely announce a 10bps reduction to the deposit rate, bringing rates to a fresh record-low, and even deeper into negative territory, at -0.50%. Such a rate cut has been fully priced in, with market pricing evenly split between this, and a deeper 20bps rate reduction.
  • Tiering - Any rate cut will almost certainly be accompanied by mitigating measures, designed to reduce the policy's impact on eurozone banks. The tiering system, which will likely exempt a proportion of banks' reserves from negative interest rates, protection the monetary policy transmission mechanism.
  • Forward Guidance - Policymakers are also set to dovishly revise their forward guidance, moving away from a 'date-based' approach, instead indicating that rates will remain 'at their present levels, or lower' until either the achievement of a data milestone, or until after the end of net asset purchases.
  • Quantitative Easing - Speaking of asset purchases, the Governing Council are expected to resume their bond-buying programme, likely at a pace of around 30bln EUR per month for the next 12 months. Such a programme is, however, not without issues; namely, issuer limits leaving little policy headroom, and opposition from more hawkish members of the Governing Council.
  • Symmetry - Policymakers may further emphasise the importance of a symmetrical inflation target - i.e. allowing the pace of price increases to overshoot target to make up for periods of undershooting. Such a move would be a dovish signal, indicating lower rates for longer.
  • Macroeconomic Projections - Staff forecasts for both HICP inflation and GDP growth are set to be downwardly revised. Inflation projections will likely be revised lower due to a sluggish pick up in prices, along with lower than expected oil prices. GDP growth prospects will also likely fall, due to a continued slowdown in manufacturing as well as increasing global risks.

Looking at the likely market reaction, a significant degree of policy stimulus has already been priced into the euro, hence an announcement in line with market expectations, and those outlined above, may result in the euro strengthening. Such an eventuality would be a good example of a 'sell the rumour, buy the fact' trade. On the other hand, should Draghi spring a dovish surprise, say by announcing a 20bps rate cut, or a more sizeable bond-buying programme, the euro would likely experience a significant sell-off.

Turning away from the ECB's policy decision, today's other highlight comes in the shape of August's US CPI figures. The data is set to show inflationary pressures continuing to build, with headline CPI expected at 1.8% YoY, and core CPI, which removes the effects of food and energy prices, expected at 2.3% YoY. The latter reading would indicate the fastest pace of increases since July 2018. Despite mounting inflationary pressures, due to both a tight labour market and the imposition of trade tariffs; the FOMC remain likely to announce a 25bps rate cut next week, with the US monetary policy outlook dependent on the global risk backdrop.

Today's Economic Calendar

Time Currency Release Consensus Previous
12:45pm EUR ECB Interest Rate Decision (Refi Rate) 0.0% 0.0%
12:45pm EUR ECB Interest Rate Decision (Depo Rate) -0.50% -0.40%
1:30pm EUR ECB Monetary Policy Statement & Press Conference
1:30pm USD CPI (YoY - Aug) 1.8% 1.8%
1:30pm USD Core CPI (YoY - Aug) 2.3% 2.2%