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ECB throws a curve ball, EUR/USD post biggest one day fall since Brexit

Today’s macro highlights:

  • USD - University of Michigan Consumer Sentiment (June)
  • EUR - CPI Inflation (May)

ECB throws a curve ball, EUR/USD post biggest one day fall since Brexit

There’s been much speculation that the busy economic and political calendars of the last week would lead to some heightened volatility for major currency crosses. By and large that didn’t materialise, but yesterday’s surprise move by the ECB - that it would take until the year end to wind down its bond buying package rather than have this concluded by September left the common currency in freefall. The most marked reaction was against the US dollar, with the pair tumbling two and a half cents on the back of the news - that’s the biggest one day fall since the UK voted to leave the EU - whilst GBP/EUR added a cent. Many of those who thought currency risk would be a wash this week have been left reeling.

Against the busy calendar we’ve seen since Monday, the week will end on a rather muted note. At 10m BST we have the Eurozone inflation data, although in light of yesterday’s comments by the ECB, this will now only have limited relevance. A shortfall from the expected 1.9% reading here could suppress the Euro even further although downside exposure could be limited simply by the fact we’ve seen EUR/USD fall so far already.

3pm BST sees the release of the latest US consumer sentiment data from the University of Michigan. The outlook for the US economy clearly remains bullish with the Federal Reserve intimating that they still expect to make two further interest rate hikes before the year is out. In line with this, today’s reading should impress despite rising borrowing costs and those high fuel prices as the US moves into the summer driving season.

One broader factor worthy of note is the way Sterling is now tracking the Euro. Historically we’ve often seen the Pound find favour when the Euro has been under pressure, as it’s given international investors the opportunity to have some limited degree of European exposure without buying the common currency. However that news of slower policy tightening from the ECB was sufficient to knock GBP/USD two cents lower - and that’s despite the significantly hotter than expected UK Retail Sales readings we saw yesterday morning. 

Yesterday’s Eurozone driven losses have pushed the pair close to lows for the year and could prove difficult to maintain. With UK economic data continuing to look upbeat, the currency may well start to look oversold at these levels, encouraging a fresh round of buying and allowing something of a rally into the weekend break.

Whilst yesterday’s more dovish than expected statement from the ECB warranted something of a sell-off for the common currency, the magnitude of what we saw could yet prove to be overdone. Assuming there’s no significant disappointment in today’s Eurozone inflation data then a rally could well follow. 

The pair is sitting at highs for the month but further gains could be reliant on more suggestions that the Bank of England will hike interest rates at the August meeting. UK economic data is however relatively subdued over the coming week so realising the appropriate signals may be difficult to find.