ECB flags end of QE is nigh
With a lack of UK economic data releases, the Pound has been listless with only political and global factors to drive moves. Brexit uncertainty continues to stifle the potential for Sterling gains. The Tories are struggling to contain the rumours of a serious schism at the top, with major disagreements between Theresa May and Brexit Secretary David Davis over the Northern Ireland border backstop plan.
Bank of England external MPC member Ian McCafferty stated that inflationary pressures are starting to build but low interest rates are still likely to be around for some time. Markets have already priced in that he will continue to back an interest rate hike in the near term. UK bond yields moved significantly higher, although there was also a sharp increase in German yields.
Sterling mustered a 10-day high against the Dollar, peaking near 1.3450 before fading again. The Euro strengthened to around 1.1390 against the Pound.
Early yesterday morning, EU Chief Economist Praet stated that inflation expectations are increasingly consistent with the European Central Bank’s (ECB) target. According to Praet, there was growing evidence that labour market strength is feeding into rising wages and underlying strength in the economy has persisted. A discussion on ending quantitative easing will be needed at next week’s meeting and forward guidance would then have to be specified further.
Council member Ardo Hansson stated that interest rates could increase before mid-2019, sooner than the market expects. Bundesbank head Jens Weidmann also expects quantitative easing to end this year and DNB head Klaus Knot called for an early end to the program. The relatively hawkish remarks triggered a fresh Euro climb against the Dollar with a break of the 1.1735 resistance area also triggering buying. Peter Praet’s comments are the most significant and markets now suspect that a decision on ending the ECB quantitative easing programme could be announced at next week’s policy meeting.
The Greenback continues to suffer the selling mood and is now treading water around weekly lows in the 93.40 region when tracked by the US Dollar Index (DXY).
With Trump signalling his intention to push ahead with trade tariffs, it is interesting to note that the US trade deficit in April fell to a seven-month low with the deficit coming in at $46.2bn, down from $49bn previously. Seeing that through the trade deficit with China, this has expanded from the previous month.
Trade tensions cooled off a bit after the US Treasury Secretary Steven Mnuchin reportedly proposed to exempt Canada from metals tariffs and China offered to buy around $70 billion of the US goods.
Trader focus is going to be moving onto the US jobless claims due at 13:30 UK time, and both Continuing and Initial Jobless Claims are expected to tick up slightly. Continuing Claims are expected at 1.738 million (prev. 1.726 million) and Initial Jobless Claims forecast at 225 thousand (prev. 221 thousand).
Data to watch:
10:00 EUR Gross Domestic Product s.a. (YoY) (Q1)
10:00 EUR Gross Domestic Product s.a. (QoQ) (Q1)
13:30 USD Continuing Jobless Claims (May 25)
13:30 USD Initial Jobless Claims (Jun 1)
16:00 GBP BOE Ramsden Speech
16:15 CAD BoC Governor Poloz Speech
20:00 USD Consumer Credit Change (Apr)