Draghi readies QE extension
Yesterday we witnessed an abundance of volatility, mainly to the detriment of Sterling as traders squared positions in anticipation of data releases today. The most likely contributor to volatility is the plethora of central bank data that we are due today from both European Central Bank President, Mario Draghi, and Federal Reserve Chair, Janet Yellen.
Today, the wait is finally over for those ever-expectant market participants as the release of the Eurozone interest rate decision is due at 12:45pm. The overwhelming consensus is that the deposit interest rate will be cut by a further 10 to 15 basis points. Soon after, Mr Draghi is due to meet the press for the monetary policy statement. Many feel that this will be the time he declares an extension to the quantitative easing programme. Currently, the programme is due to finish in September of 2016, but many economists feel that a further three to six months will be added.
Results from yesterday’s data will have contributed to those opinions as Eurozone inflation fell once again, with the year-on-year figure showing that Eurozone inflation averages out at 0.9% for the 12 months to November.
Following a strong ADP reading yesterday the Dollar resumed its ascent against both the Euro and Sterling. The ADP figure is seen as a leading indicator to Friday’s Non-Farm Payrolls (NFP), and a five-month high reading of 217K, above market expectations of 190K for the month, was enough to push the Dollar past the 1.50 barrier against the Pound. The Non-Farm figure is likely to be the final hurdle before the Fed meet to decide whether to hike rates or not.
Overnight the Fed’s chair Yellen said “data since the October meeting is consistent with improving labour markets and confidence inflation will move to the Fed’s target; [I am] looking forward to the day when the Fed can raise rates as a testament to the magnitude of economic recovery”. Yellen’s delivery of a bullish speech will focus attention on her testimony to Congress later today.
Even Fed President Dennis Lockhart, who is typically seen as a more dovish Fed speaker, was quoted as saying “the case for an interest rate hike is compelling”. With even the most conservative policy makers seemingly readying themselves for a rate hike, it would seem that only an exceptionally poor NFP reading on Friday could delay lift-off.
Yesterday the Markit UK Construction Purchasing Managers’ Index fell to 55.3 from 58.8 in October, well below expected levels of 58.2. Growth in Britain’s construction industry dropped to a seven-month low in November, hurt by the weakest expansion in housing activity since mid-2013. This was according to a survey suggesting that the sector will continue to drag on the economy. With no tier one UK data tomorrow, Sterling movements will be dictated by the Euro and the Dollar.
Data to watch: 9am EUR Markit PMI, Services and Composite. 12.45pm EUR Interest Rate Decision. 1.30pm EUR Monetary Policy Statement & press conference, US Initial Jobless Claims. 2pm US Janet Yellen Testifies. 2.45pm US Markit PMI, Services and Composite. 3pm US ISM Non-Manufacturing PMI & Factory Orders. 5pm US Stanley Fischer speech.