This week, European Central Bank President Mario Draghi is expected to cement his dovish outlook for the region by unsheathing a number of stimulus measures at his disposal. Draghi hopes that an expansive package will help shore up weaker economic growth in the bloc that has fallen victim of an overall slowdown in global growth. The move could limit the longer-term upside for the Euro and risk bringing Trump back to his keyboard with another Twitter rant aimed at both the ECB and the Federal Reserve. Significant action could leave the central bank vulnerable to accusations that they are engaging in a ‘currency war’ and will also provide the US President with ammunition to pressure the Fed into a second consecutive interest-rate cut.
The urgency with which the ECB should act was compounded once again on Friday when German Industrial Output fell by 0.4% for the month of July, adding to the 1.1% decline in June. This raises the prospect of a technical recession for the continent’s largest economy in Q3 if the trend continues. A Bloomberg survey of economists has also resulted in downgraded German growth forecasts of 0.0% for this quarter and 0.1% for the final quarter of 2019. Still, we expect Mario Draghi to face his biggest pushback to quantitative easing in what will be his penultimate ECB meeting as Chief, as some central bankers are wary of the ECB using too much of its arsenal too soon.
Bottom line: In what promises to be a pivotal week in global economics, we expect an ECB interest-rate cut and the re-introduction of its bond-buying programme. It will then remain to be seen whether the package will be bold enough to provide enough of a boost to rescue the outlook for European growth over the coming year.
Brexit drama had initially weakened the Pound this morning as markets reacted to new defections along with legal threats to Prime Minister Boris Johnson. However, positive UK growth data showing a 0.3% expansion in July versus the 0.1% forecast has lifted the GBP/USD exchange rate above the 1.23 level.
Sterling’s earlier slide brought the pair briefly under 1.11 as jitters remain over today’s Parliamentary vote on an early October 15th election. Reports have also emerged that Johnson will mount a legal challenge over having to seek a delay of Brexit if no deal is agreed by Britain’s departure date. A rebound in UK GDP data this morning has provided some fresh Sterling upside.
The pair remains steady in the low 1.10’s as the reaction to Friday’s weak German Industrial Production data was muted. Further Euro downside seems limited as markets have already priced in significant policy action when the European Central bank meets later this week; however, that same policy action could serve to limit the longer-term upside for the single currency.