ECB and BoE Policy Meetings Today

The subprime crisis during the previous decade marked the beginning of the usage of unconventional monetary policy tools by developed economies to counter economic shocks. Taking the mantle forward, the ECB in today’s monetary policy meeting could possibly set a fresh precedent by slashing interest rates into the negative territory, a move never adopted before by major global central banks. Additionally, comments from the ECB Chief will be closely followed in order to gauge if the ECB will be willing to use more of its firepower in the future. With the domestic economic recovery remaining steady, the BoE is likely to hold its stance unchanged. However, contemplation over the overheating housing market during the policy meeting cannot be ruled out.

Pound Sterling – UK Markets

The Pound is trading in a tight range, albeit on a firmer footing, against the US Dollar this morning. Data released earlier today indicated that on a monthly basis, the Halifax house price rose sharply for April, thereby raising concerns about a potential housing bubble in the nation. In the wake of recent reports released this week indicating that house prices continue to rise, it remains to be seen whether the central bank adopts any measures to ease fears about a possible overheating in the housing market. Against the backdrop of the current economic situation, the BoE is unlikely to alter its policy stance in its meeting scheduled later today. However, with the ECB ready to act in today’s policy meeting, volatility in the Pound-Euro pair cannot be ruled out. The better than expected UK services PMI for May on the back of strong pace of business expansion and jobs growth helped the Pound to register gains against both the US Dollar and the Euro in yesterday’s trading session. Meanwhile, the BoE financial policy committee member, Richard Sharp, reinforced that economic growth in the UK continues to remain fragile due to a variety of risks from home and abroad.

US Dollar – US Markets

The US Dollar was range bound against the Euro yesterday. On expected lines, economic data from the US yesterday had limited influence on the Euro-US Dollar pair, as market participants positioned themselves for today’s much anticipated monetary policy meeting in Europe. Although the build up to the ECB policy meeting has kept traders on the edge, it is likely that market participants must have taken note of key signals that emerged from yesterday’s economic data in the US. Earlier this week, data from the ISM showed that manufacturing activity expanded at a moderate pace while yesterday’s services sector data revealed a further acceleration for May, thereby validating that the US economy continues to recover at a steady pace during the second quarter from the weather related weakness seen earlier this year. Furthermore, the US Fed’s Beige Book survey echoed a similar optimism about the state of the US economy. However, the ADP report showed that the pace of hiring in the private sector was slower than expected. Today’s jobless claims figures are likely to offer greater clarity on the US labour market but the release is likely to be overshadowed by the crucial monetary policy meeting in the Euro zone.

Euro – European Markets

Following months of delay, the central bank seems ready to cut its refinancing and deposit rates to prevent inflation from falling further, amid evidence that weak prices continue to undermine recovery in the currency bloc. Today’s decisive policy move remains on the cards as the ECB Chief, in the last month’s post-meeting conference, announced that the central bank is ready to act in its June meeting. Furthermore, investors will keep a close watch on today’s post-meeting conference wherein it will be watched if Mario Draghi unveils any details of a lending programme to support domestic businesses and look for hints of the ECB adopting QE style measures in future. Meanwhile, the Euro is range bound against most of its major counterparts this morning. Data released earlier today indicated that German factory orders rebounded for April on the back of increased demand from other European countries. In yesterday’s trading session, the Euro limited its upside against the US Dollar following mostly dismal services activity data from European economies and as investors preferred to remain on the sidelines ahead of today’s ECB policy meeting.

Other Currencies – Highlights

The Bank of Canada Governor, Stephen Poloz, kept interest rates unchanged yesterday and offered a dovish view of the global economy which kept the Canadian Dollar under pressure against the greenback. Poloz further highlighted that economic growth in the nation for the first quarter was weaker than expected while low inflation continues to remain a major concern. He also opined that recent developments have added to downside risks to the economy, which might potentially weigh on the already weak Canadian inflation, thereby weakening expectations of a rate hike any time soon. Moreover, data showed that the domestic trade balance for April swung to a deficit as exports eased and imports increased more than expected, further pressurising the Canadian Dollar against the majors. In the session ahead, markets will keep a tab on Canadian building permits and manufacturing PMI reports for further direction to risk appetite. Additionally, the US and domestic labour market data due tomorrow will prove crucial for the Canadian Dollar against its US counterpart in the near term.