Currency markets came alive yesterday following stronger-than-expected UK retail sales, an ultimately dovish ECB policy meeting and release of strong US retail sales data for May. Net result is that the US dollar is on the rise across the board and the Euro has collapsed. GBP/USD rally was short-lived and cross is now at its lowest since late-November and EUR/USD is below 1.16 for the first time since late-May and threatening to break through an 11-month low.
Markets went into the ECB meeting expecting a hawkish turn and the Euro was appreciating ahead of the statement and President Draghi’s press conference. The markets’ mistake was seemingly to ignore the well-documented underlying weakening of Eurozone growth in recent months. While the ECB announced a tapered end to quantitative easing, in line with market expectations, it signalled that this was conditional on data confirming the ECB’s inflation outlook. The ECB also disappointed those expecting rate hikes as early as June 2019 and a possible discussion about a reduction in the ECB’s balance sheet.
It is not obvious that an end to ECB QE – which removes a source of economic stimulus and makes it more expensive/harder for Eurozone countries and corporates to finance themselves – coupled with slowing Eurozone economic growth is a winning combination for the Euro. In any case markets will likely going forward be far more sensitive to Eurozone macro data than they have been in recent weeks.
