The Dollar is ending the week on a strong note, Sterling has once again tanked while the Euro has ultimately showed little reaction to yesterday’s ECB policy meeting (and Draghi’s dovish innovation) and weak German IFO data.
The Dollar trade-weighted index is up 0.6% this week to a 10-week high, with markets reacting favourably to the release of strong US durable goods figures for June and stronger-than-expected GDP growth in Q2. Durable goods orders, excluding defence and transportation – a proxy for domestic investment – rose 1.9% mom, the strongest growth rate in over a year. Moreover, while GDP growth slowed from 3.1% qoq annualised in Q1 2019 to 2.1% in Q2, this was better than analysts’ consensus forecast of 1.8% qoq growth.
The Euro has remained broadly unchanged in the past 48 hours in trade-weighted terms. The ECB left its policy rates unchanged yesterday, with markets having priced in a modest probability of a rate cut. Market doves may have may been assuaged by ECB President Draghi’s comment that the ECB’s inflation target could be asymmetric, given weak economic activity, and specifically that the ECB could tolerate inflation above 2%. Moreover, Draghi – who will preside for only two more policy meetings before stepping
down on 31 October – left the door wide open to policy rate cuts and/or a new round of quantitative easing. Euro stability will be one of Draghi’s successful legacies but his successor, Christine Lagarde, will inherit markets seemingly unconvinced that the ECB can stimulate growth and inflation.
The mid-week rebound in Sterling has proved short-lived, with the trade-weighted index down 0.4% to an 8-session low. The GBP/USD cross has tanked back below 1.24 – the low since early 2017 – while GBP/EUR, which had briefly rallied above 1.12, is back down to 1.113. The main driver of this latest bout of Sterling pressure has seemingly been the pro-Brexit composition of newly appointed prime minister Boris Johnson’s cabinet and the concern that, unlike his predecessor, he will be true to his word in
taking the UK out of the EU on 31st October, with or without a Brexit deal in place.
