Draghi's Optimistic Tone Sends Euro Higher
What’s been happening?
Pound Sterling – UK Markets
The pound sterling weakened vs the euro on Thursday as the European Central Bank’s policy announcements and President Draghi’s remarks helped the shared currency outperform its rivals. Against the dollar, sterling closed the day virtually unchanged.
While delivering the Bank of England’s annual report, Governor Mark Carney noted that the upward pressure on prices was likely to build if the economy performed as expected by the MPC. Carney further added that it was likely for them to raise the policy rate in order to keep inflation near target. “Any rises in interest rates are expected to happen at a gradual pace and to a limited extent,” Carney explained.
Meanwhile, in an interview with Daily Mail, Prime Minister candidate Michael Gove argued that a short extension to Brexit could be warranted to avoid a no-deal Brexit. “Would it really be in our best interests to opt for a no-deal exit when just a little more time and effort could make all the difference?” Gove questioned and added that a rush into a no-deal exit would give the Labour Party and its leader Corbyn more power.
US Dollar – US Markets
The data published by the U.S. Census Bureau on Thursday showed that the trade deficit in April narrowed to $50.8 billion from $51.9 billion in March. Other data revealed that nonfarm productivity in the first quarter dropped to 3.4% from 3.6% and unit labour costs in the same period declined by 1.6% to hint at soft wage inflation. Finally, weekly jobless claims came in at 218K to match the previous reading.
Commenting on the policy outlook, NY Fed President Williams said that markets were speaking “pretty loudly” on where interest rates should go, but added that markets’ views were informative but they did not force the Fed’s hand.
Earlier in the day, while speaking to reporters in France, U.S. President Trump said that he would make a decision on tariffs on $300 billion worth of additional Chinese imports after the G20 summit. On the same issue, the South China Morning Post claimed that Trump is planning to announce tariffs on all Chinese imports after G20. Meanwhile, the latest headlines surrounding the U.S.-Mexico immigration conflict, Bloomberg reported that the U.S. could delay tariffs on Mexican imports as sides needed more time to finalize the negotiations.
Euro – European Markets
The euro closed the day higher against both the dollar and the pound sterling on Thursday boosted by European Central Bank President Mario Draghi’s remarks during the bank’s monetary policy press conference. Earlier in the day, the data published by the Eurostat showed that the GDP in the eurozone expanded by 1.2% on a yearly basis in the first quarter to match analysts’ estimates.
As expected, the ECB decided to leave the interest rates on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility unchanged at 0.00%, 0.25% and -0.40%, respectively. Although the bank in its policy statement said that the interest rates were expected to remain at present levels through the first half of 2020, the negative impact of this change on the euro quickly faded away quickly as investors saw that the Governing Council decided that the interest rate in each operation of the TLTRO III will be set at a level that is 10 basis points above the average.
During the press conference, Draghi announced that both the growth forecast and the inflation forecast were revised upward from March forecasts. Additionally, Draghi said that there was a very low probability of a recession and added that there was no threat of de-anchoring in inflation expectations.
What’s coming up?
UK: Halifax House Prices will be the only data featured in the UK economic docket on Friday.
US: The nonfarm employment report, which includes unemployment, average hourly earnings, and labour force participation rate figures, will be released on Friday.
EU: Germany’s Destatis will publish industrial production and trade balance data on Friday.