Markets Calm Down as Attention Turns to EU Summit and Draghi
What’s been happening?
Pound Sterling – UK Markets
The British pound fell to its weakest level in more than two weeks against the shared currency on Tuesday and closed the day virtually unchanged vs the dollar as investors continued to refrain from making large bets ahead of Wednesday’s critical Brexit summit.
While speaking to reporters earlier in the day, the European Union’s chief Brexit negotiator, Michel Barnier, reiterated that the EU’s stance had not changed and they would not reopen the Withdrawal Agreement. Barnier further echoed remarks from EU leaders earlier this week saying that the UK needed to give the EU a Brexit roadmap that has a clear aim. Meanwhile, British Prime Minister Theresa May’s spokesman reminded that the legal default at the current situation was a no-deal on April 12 and added that the PM’s rationale for a short extension was that the need for certainty from both sides.
US Dollar – US Markets
The US Dollar Index, which gauges the dollar’s value against a basket of six major currencies, made indecisive moves on Tuesday amid mixed macroeconomic data releases. Additionally, the 10-year Treasury bond yield slipped below the 2.5% mark to force investors to take a step back and assess the risk perception.
In its Small Business Optimism Report for March, the NFIB revealed that the Optimism Index ticked up to 101.8 from 101.7 in February. “Overall, the Index anticipates solid growth, keeping the economy at “full employment” with no signs of a recession in the near term. The Uncertainty Index dropped six points to 79, returning to a more normal level for recent years,” the NFIB said in its publication. On the other hand, the IBD/TIPP Economic Optimism Index decreased to 54.2 in April from 55.7. Further details of the report revealed that the six-month outlook weakened further with the sub-index dropping to 48.8.
In the meantime, commenting on President Trump’s recent criticism of the Fed’s monetary policy, Head of Supervision at the Federal Reserve, Randy Quarles, said that White House comments wouldn’t factor in the FOMC decisions and reğeated that the Fed was “data-driven” and “very disciplined.”
Euro – European Markets
The shared currency continued to outperform its rivals and rose to its highest against the greenback in nearly two weeks while posting gains vs the pound sterling for the fifth straight trading day as markets are gearing up for Wednesday’s crucial European Central Bank meeting. Earlier this week, Germany’s bank lobby group BdB’s president, Hans-Walter Peters, in a statement said that the ECB should reduce the charge that banks pay on some of their excess cash by introducing a tiered deposit rate. “If the ECB is unable to end the era of negative interest rates this year, then it should at least take the central banks in Switzerland and Japan as a model,” Peters further elaborated.
The only data from the euro area, which was largely ignored by the market participants, showed that retail sales in Italy increased by 0.1% on a monthly basis in February to match analysts’ estimates.
What’s coming up?
UK: The UK’s Office for National Statistics will release industrial production, manufacturing production, trade balance, and monthly (February) GDP data on Wednesday. Additionally, markets will be paying close attention to headlines coming out of the EU’s Brexit summit.
US: March inflation report, which is expected to show the core CPI staying unchanged at 2.1% on a yearly basis, will be featured in the U.S. economic docket.
EU: The European Central Bank will be announcing its interest rate decision and publishing its monetary policy statement on Tuesday. Although the bank is expected to keep its policy rate and deposit rate unchanged at 0% and 0.4%, respectively, markets will be watching President Draghi’s remarks carefully.