The European economy has been battered by a manufacturing slowdown, trade tensions, Brexit uncertainty, slowing inflation… The list could genuinely go on and on. However, for some in the European Central Bank (ECB), the current economic climate just isn't weak enough to warrant a substantial stimulus package. Yesterday, Dutch central bank governor Klaas Knot suggested that the ECB should only resume its asset-purchase program if substantial deflationary risks reappear. One might argue that current conditions already represent a significant risk to future inflation and the ECB should strike while it still can – but hawks will be hawks, and Knot is most certainly a hawk. He's not alone, Bundesbank President Jens Weidmann also said that speculation over a large stimulus package 'doesn't do justice' to the latest data. Come September 12th, ECB president Mario Draghi will probably have a fight on his hands if he tries to follow through on plans for a strong stimulus package.
The fundamental agreement among ECB policymakers is that the central bank should at least deliver an interest-rate cut in September. Where there are differing opinions is on the future of quantitative easing, and we'll be looking at upcoming data releases to see if they can align opinions one way or the other. Eurozone inflation is expected to print at 1.0% today, well below the ECB's target of a sustained level just under 2.0%, and an undershoot of this figure could give the doves an easier argument come September 12th. Still, the odd bright spot exists, Eurozone economic confidence unexpectedly improved in August and a weaker Euro will certainly increase the attractiveness of EU exports.
Bottom line: We've previously argued against the efficacy of lowering interest-rates in an already negative rate environment and just how much of a boost this can provide to the slowing Eurozone economy. Draghi will be acutely aware of market participants' predictions for substantial fiscal measures, and we still believe he plans to go out 'with a bang' in his last meeting as ECB President.
The pair continues its trend lower following August's high of 1.2310 on Tuesday afternoon. Cable trades below 1.22 this morning as the Dollar Index surged close to year-to-date highs. Fears of a no-deal Brexit also continue to weigh on the currency pair despite Boris Johnson announcing a schedule of intensified meetings with the EU in September.
The pair trades near the same level it began the week at since the Pound and the Euro have both weakened against the Dollar. Expectations of looser monetary policy from the European Central Bank and fears of a no-deal Brexit have weighed on their respective currencies this week. The pair has closed above 1.10 every day this week despite dipping below the key support level multiple times throughout trading sessions.
The common currency looks set to end August close to the two-year low set at the beginning of the month. A combination of Dollar strength and Euro weakness has caused this week's downward trend. Expectations of monetary easing from the European Central Bank next month remain high, which has added pressure on the Euro.