Draghi under increasing pressure to cease QE
Investors took a more cautious approach to Sterling yesterday which reflects that they foresee Brexit-related difficulties ahead, especially with uncertainties over the reaction of EU countries. The Supreme Court has announced that the government will learn next Tuesday whether it has won its legal battle to get Brexit under way without the need for a vote by MPs.
UK unemployment fell to its lowest level for more than a decade, 1.6 million, in the three months to November. The headline increase in annual average earnings strengthened to 2.8% from 2.6%. This is the highest reading since late 2015 and could fuel expectations of some upward inflationary pressures, but an annualised increase of more than 4% would be needed to spark major concerns. Sterling retreated back below 1.2300 against the Dollar.
Overnight, the RICS December house price index retreated to 24% from 29% previously with an underlying weaker tone. This was contrary to most other data which has indicated a firm housing sector. However, Sterling held steady above 1.2250 against the Dollar.
The Eurozone annualised Consumer Price Index printed an increase of 0.6%, up to 1.1% for December. The positivity generated by an inflationary increase supported the Euro, moving GBPEUR to daily lows around 1.1480 levels and pushing EURUSD above the 1.0650 level.
The slightly upbeat Eurozone inflation data continues to provide some support for the Euro but will likely be overshadowed by the European Central Bank’s (ECB) Monetary Policy Decision, it’s 1,000th board meeting, to be held by the later today.
After a series of impressive economic data of late, Draghi’s challenge will be to justify the stimulus programme given that inflationary pressures are building. The German Finance Minister has already called for an earlier end to the programme. The ECB is not expected to announce any changes to monetary policy at today’s policy meeting, but Draghi’s press conference will be important for underlying market expectations for the Euro.
The U.S. Dollar has been turbulent this week, after dropping by more than 1% on Tuesday. However the Dollar index recovered 0.9% from its lows following US Consumer Prices Index data. The rally was relatively short lived as a generally cautious mood prevailed, especially with uncertainties surrounding global trade policies under the incoming Trump administration. A spokesman for Trump’s administration confirmed that North American Free Trade Agreement renegotiation would start very soon after the inauguration.
Data to watch: 12.45pm EUR ECB Monetary Policy Decision. 1.30pm ECB Press Conference.