Euro Drops to 20-Month Lows vs Dollar on ECB's Dovish Shift
What’s been happening?
Pound Sterling – UK Markets
The British pound weakened to its lowest level in ten days against the dollar but was able to take advantage of the broad euro weakness. In the absence of significant macroeconomic data releases from the UK, investors stayed focused on the developments surrounding Brexit talks and the European Central Bank meeting.
Citing a British government source, Reuters on Thursday reported that there was no reason to expect any changes in Brexit talks with the EU in the next 48 hours. Moreover, addressing the media in a joint press conference with Attorney General Cox following their meeting with the EU’s Barnier, British Foreign Secretary Jeremy Hunt said that he was hoping for a breakthrough this weekend in time for next week’s parliamentary vote. “We are discussing detailed, coherent, careful proposals and text with the EU on the backstop. We remain committed to getting what parliament says it needs for the backstop in Brexit talks,” Cox explained.
In the meantime, commenting on the policy outlook, Bank of England (BOE) MPC member Silvana Tenreyro said that a disorderly Brexit would require loosening of the monetary policy rather than tightening. “Sterling would likely appreciate after a smooth Brexit, which would limit inflation pressure,” Tenreyro added.
US Dollar – US Markets
The US Dollar Index, which tracks the greenback against a basket of six major currencies, rallied to its highest level since June 2017 as the divergence of monetary policies between the Fed and other major central banks became apparent with both the Bank of Canada and the European Central Bank acknowledging the economic slowdown and taking a step back to reassess the situation.
Thursday’s data from the United States showed that the unit labour costs in the fourth quarter increased by 2% following the third quarter’s 0.9% reading and surpassed the market expectation of 1.6%. Moreover, nonfarm productivity in the same period rose by 1.9%. Finally, the Bureau of Labor Statistics reported that initial jobless claims decreased by 3,000 to 223,000 in the week ending February 25.
Euro – European Markets
The shared currency came under heavy selling pressure on Thursday and fell to its weakest level against the dollar in more than 20 months and recorded losses vs the pound sterling for the third straight day.
As expected, the Governing Council of the European Central Bank (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. In the policy statement, however, the bank changed its forward guidance on the timing of the next rate hike and said that the Governing Council expected rates to remain at their present levels at least through the end of 2019 rather than the end of summer. Additionally, the ECB announced that it will be offering fresh stimulus to banks amid rising concerns over the economic slowdown in the euro area. ”A new series of quarterly targeted longer-term refinancing operations (TLTRO-III) will be launched, starting in September 2019 and ending in March 2021,” the bank unveiled.
Speaking at the press conference, President Mario Draghi said that the Governing Council was now expecting the economy to expand by 1.1% in 2019 compared to 1.7% seen in December. Draghi further acknowledged that the near-term growth outlook was weaker than anticipated. “Weakening in the economic data points to sizeable moderation of the pace of expansion,” Draghi added.
What’s coming up?
UK: The Bank of England will release the Consumer Inflation Expectations on Friday.
US: The nonfarm payrolls report, which includes unemployment rate, average hourly earnings, and labour force participation figures, will highlight the economic calendar. Housing starts and building permits will be published as well.
EU: Factory orders from Germany will be featured in the European economic docket.