What does Draghi have left in his bag of tricks?
The Euro had a choppy trading day yesterday as the minutes of the latest European Central Bank Monetary Policy Accounts meeting were released. Versus Sterling, a positive move dumbfounded most traders as it would seem that the bloc currency didn’t have many grounds on which to erase some of the losses it has incurred over the last few weeks.
It has been widely publicised that Mario Draghi and Co will have to reconsider the extent of policy and be ready to act next month. It now seems more or less certain that we will see an adjustment to monetary policy, with the ECB becoming more accommodating. Also, in the coming weeks, it is likely that we will witness a revision in the bank’s inflation outlook which is likely to be to the detriment of the Euro.
The weaker-than-expected UK retail sales data and upbeat US retail sales and Philly Fed data failed to weaken Sterling as the overcrowded USD long trade witnessed modest profit taking. The Fed’s Foley has said that the US rate hike outlook has shifted from beyond a December lift off, with more emphasis now being the on the trajectory for 2016. She adds that Yellen’s focus remains on the trajectory of the rate hike path. The Fed could hike in December but in a very dovish way, says Foley. Adding to this, she highlights how Fed member Fischer talked about the appreciation of the USD and its negative impact on inflation and industries in the US.
While economists remain hawkish on a Bank of England rate hike, the money market thinks the other way. On the forecast for UK rates, Foley predicts an August 2016 rate hike, and comments that sterling strength has already done a lot of monetary tightening in the UK.
Data to watch: 8am Euro ECB Draghi speech. 2pm Fed’s Bullard Speech