June 15, 2018

Markets Today: Euro trashed on ECB hike delays

The ECB announced today, as anticipated, that their QE program will finish at the end of the year. But markets weren’t quite expecting the anticipated delay in raising rates – which could be late in 2019.

Today’s podcast:



  • FX moves well and truly in the spotlight
  • ECB announces tapering, then ending of QE after September, as expected
  • But downgrades GDP for this year and still forecasts sub 2% inflation through 2020
  • And pushes out expectation of first rate adjustment until after the summer of next year; markets had been expecting mid 2019; also laced with dollops of Draghi “uncertainty”
  • EUR takes a bath, dragging AUD, GBP, NZD, CAD and more lower as the USD rallies; Euro under-performs on the crosses too

There have been some big FX moves overnight centred around the Euro and the USD in the wake of the Fed announcements yesterday coming with a hawkish leaning, followed overnight with the formal (and expected) ending of ECB’s Asset Purchase Program (APP), but pushing out expectations of when rates might be first adjusted and laced with “uncertainty” caveats from the ECB President Draghi.  After making some modest gains to around 1.1825, the Euro was sold aggressively lower, smashing though 1.18 and 1.17, continuing to lose ground, sitting currently at the overnight lows below 1.1580.

Among the other non-USD majors, the AUD has taken nearly as much of a hit, the Euro down 2.1% on the move and the AUD down a big figure from 0.7560 to 0.7475/80, down by over 1% in the wake of the ECB announcement.  Base metals were softer overnight, as was Brent, though the bulks were little changed, gold a tad higher.  Yesterday’s mix May employment report and Chinese activity data have also not helped.  The Aussie is lower on most of the crosses, barring the Euro.

The ECB announced no changes to rates (entirely expected) but that the APP beyond September would be tapered from purchases of €30bn in September to €15bn per month in the December quarter before ending in December.  That part of it was expected.  While inflation was upgraded from 1.4% for this year and next year by 0.3% to 1.7%, there was no change to the 2020 forecast that remained unchanged at 1.7%.  No “2” handle and thus not yet getting to target. Couple that with the prospect now that rates will be on hold at least through the summer of 2019, rather than an expectation of a move a year from now and the seeds were sown for a pullback in the Euro.  After recent almost-hawkish remarks from ECB Chief Economist Praet, the market was hoping for more and disappointed.

There has also been reporting in the German press suggesting that the Bavarian CSU is considering breaking with Merkel’s CDU, adding to the Euro’s woes.  Bavaria’s CSU is demanding that refugees are immediately turned away at the border, while Merkel’s CDU party wants talks with other EU countries on policies to curb illegal immigration first.

Speaking at his press conference, Draghi described why the ECB took the decisions it did today and was asked whether he might be able to raise rates once before he leaves (Oct 2019).  His watchword was uncertainty, something he repeated.  This did not sound like a man or Governing Council that was especially confident in why they decided to end QE.  You could be forgiven for thinking that the ECB has set the market up nicely to expect more and delivered a result where the market has not over-reacted to anything that could be interpreted as hawkish.

After stalling initially after the FOMC announcement, ostensibly on US-China trade tensions with some expectation the White House would wheel out a list of new tariffs on Chinese imports, it’s been one-way traffic overnight, the DXY index up 1¼% to 94.73.  (Speaking on Fox News overnight, the President said that “China could be a little bit upset about trade because we are very strongly clamping down on trade”.) The dollar’s resurgence was done no harm by the May US Retail Sales report revealing headline sales growth of 0.8%, double market expectations and for the Retail Sales Control Group that feeds into Consumer spending, it rose 0.5% (0.1% better than the consensus), coming with a handy 0.2% upward revision to April.  The Atlanta Fed’s GDPNow estimate was nudged higher from 4.6% to 4.8% on the basis of higher growth in consumer spending.  Weekly US Jobless claims remained low, down 3K to 218K for the week ended June 9.

UK Retail Sales continued their saw tooth pattern, in May blowing expectations apart, rising by 1.3% in the month (expectations were 0.3%), thanks to the Royal Wedding and very good weather.  This supported sterling (and continued to do so against the Euro), but as the Euro headed south, so too did the Cable.

Coming up

  • NZ has its BusinessNZ Manufacturing PMI for May at 8.30 (L: 58.9)
  • The RBA’s Luci Ellis speaks today at an Infrastructure event (13.32)
  • The BoJ meets and should come and go without too much fanfare
  • US Industrial Production for May is out tonight
  • White House tariff announcements?

Market prices

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