Euro Plummets as Draghi Opens Door For Rate Cuts
What’s been happening?
Pound Sterling – UK Markets
The British pound staged a decisive recovery vs the euro on Tuesday as the currency came under heavy selling pressure following European Central Bank President Draghi’s remarks on the policy outlook. Against the dollar, the sterling was able to post small gains as well.
In the second round of voting for the Conservative Party leadership on Tuesday, Boris Johnson received 126 votes to lead the race and former Brexit Secretary Dominic Raab got eliminated after coming in last with only 30 votes.
While speaking at the policy panel at the European Central Bank (ECB) Forum on Central Banking in Sintra, Portugal, Bank of England Governor Mark Carney made it clear that his remarks at the panel have no bearing on the bank’s policy announcement on Thursday. “Experience in the euro area and the UK shows how forward guidance can be effective in managing expectations,” Carney said in his prepared remarks. “The BoE retains the ability to relaunch the term funding scheme as necessary.”
US Dollar – US Markets
Supported by the greenback’s strong gains against the euro, the US Dollar Index rose to its highest level in two weeks but struggled to continue to push higher in the second half of the day as investors refrained from making large bets ahead of tomorrow’s crucial FOMC meeting.
The CME Group FedWatch tool shows that markets are pricing a 65.8% probability of a rate cut in July. If the Fed were to ramp up that probability with a dovish shift in its policy statement, we could see the dollar face a renewed selling pressure. On the other hand, the FOMC could acknowledge the upbeat tone in the latest macroeconomic data such as retail sales and industrial production and could opt out to stay in a wait-and-see mode, which could ramp up the demand for the greenback. Today’s data from the U.S. showed housing starts declined by 0.9% on a monthly basis in May while building permits rose by 0.3%.
Meanwhile, President Trump on Tuesday announced that he will be having a meeting with his Chinese counterpart Xi at the G20 summit in Japan at the end of the month. The renewed trade optimism helped Wall Street gain traction and finish the day with strong gains but didn’t have a notable impact on the dollar’s market valuation.
Euro – European Markets
The shared currency suffered sharp losses against its major rivals on Tuesday after ECB President Draghi in his opening remarks at the ECB Forum on Central Banking in Sintra, Portugal, surprised the markets by opening the door to rate cuts. “Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools,” Draghi said in his prepared speech. ”We remain able to enhance our forward guidance by adjusting its bias and its conditionality to account for variations in the adjustment path of inflation.” Later in the day, Draghi spoke at the policy panel and explained that the bank was not targeting a specific exchanged rate and added that the trigger for the policy action would be the “absence of improvement.” Following Draghi’s remarks, the ECB Watch revealed that money markets are now fully pricing a rate cut by the ECB by December this year.
In the meantime, the data published by the Eurostat on Tuesday showed that inflation, as measured by the core Consumer Price Index, dropped to 0.8% on a yearly basis in May from 1.3% in April while the trade surplus in April narrowed to €15.3 billion from $18.6 billion.
What’s coming up?
UK: The UK’s Office for National Statistics (ONS) will release its inflation report on Wednesday, which will include the Consumer Price Index (CPI), the Producer Price Index (PPI) and the Retail Price Index (RPI). The Confederation of British Industry (CBI) is scheduled to publish its Industrial Trends Survey as well.
US: The FOMC will announce its interest rate decision and release the monetary policy statement. At 18:30 GMT, FOMC Chairman Powell will deliver his remarks on the policy outlook and respond to questions from the press.
EU: The European economic docket will feature the ECB’s current account data on Wednesday. ECB Governing Council members Lautenschlager and Coeure, as well as President Draghi, will speak at the ECB Forum on Central Banking in Sintra, Portugal.