Currency markets, which have seen little volatility in recent weeks, came to life today. The Euro plunged after the ECB announced at its policy meeting that it would launch a program of new long-term loans for banks to ease liquidity (which many analysts had expected) and that it now expected policy rates “to remain at their present levels at least through the end of 2019”.
The ECB had until now stuck to its view that rates would go up after the summer and this more dovish outlook appears to have caught the market off-guard. The ECB in its statement and President Draghi in his post-meeting press conference emphasised the downside risks to Eurozone growth – risks which have been increasingly apparent with the release in particular of weak Q4 GDP data. The EUR/USD cross is now trading just above1.12 – levels not seen since last November – and GBP/EUR is back up to 1.165 (the high-end of a week-old range).
Whilst Sterling is broadly unchanged in trade-weighted terms today, GBP/USD has slipped below 1.31 for the first time since late-February. A warning from the EU that the British government had only 48 hours left to put forward acceptable changes to the “backstop” appears to have spooked market and re-focused minds on the fact that the UK is, under current plans, scheduled to leave the EU in only 22 days – with or without a deal.
The Australian and Kiwi Dollars have fared a little better and are both up marginally today. Markets were spooked yesterday by weaker-than-expected Australian GDP data for Q4 (0.2% qoq) but AUD/USD has managed to stabilise around 0.703 thanks in part to the release this morning of a multi-year high trade surplus of AUD 4.6bn in January.
The net result is that the Dollar is up about 0.3% today in trade-weighted terms to its strongest level since 3 January, albeit still in a narrow medium-term range, despite mixed domestic macro data in recent days. The ISM non-manufacturing PMI jumped 3 percentage points higher in February but the US goods and services trade deficit widened to $59.8bn in December – the largest monthly deficit since the 2008 financial crisis, which will not have been music to President Trump’s ears. Moreover, private-sector jobs rose by a somewhat disappointing 183,000 in February, ahead of tomorrow’s official labour market data release.
