After months of very little change in markets, the past week has been unexpectedly volatile. Each new provocation has caused gyrations across assets classes that are not simple to explain. Given this series of sometimes contradictory moves, we think it is worthwhile reflecting on the lay of the land now that things seem to be moving in a more consistent direction.
It’s a muddled picture with flights to safety alongside gains in risk assets. We sense that one of these will give way to the other, and only the news flow and Donald Trump’s Twitter feed can determine the outcome.
Bottom line: The currency picture is confused, but the risk-off tone which seems to dominate overall tends to favour Dollar appreciation, despite the US being at the centre of geopolitical tensions and likely loosening of monetary policy. What appears to be clear is that volatility has returned to markets.
Central banks across the globe have shifted guidance away from interest rate hikes as downside risks to global growth linger. Earlier this week, three key Federal Reserve officials signalled a willingness to cut interest rates, while Australia cut its interest rate for the first time in three years. Today, the focus is on the European Central Bank (ECB) as it announces its latest interest rate decision followed by the all-important ECB Press Conference with Chief Mario Draghi. The ECB has limited tools to provide monetary stimulus since its interest rate has been stuck at 0.0% since 2016, and it has already undergone a massive quantitative easing (QE) operation. There probably isn’t scope to change interest rate policy, but the long-anticipated lending program may get some fresh airing. So far this week, the Dollar index has pulled away from year-to-date highs, and the Euro has climbed on news of this global shift in monetary policy guidance. Today, the ECB may provide a key reason for the risk-on trend to continue as markets anticipate future monetary stimulus.
Bottom line: Central banks all over the world are showing signs of favouring monetary stimulus in the current economic climate, this shift may gain traction as the ECB announces its interest rate decision today, and may provide more light on its already announced upcoming batch of cheap lending.
Pessimism around the poor US ADP Employment Change figure was short-lived as the pair broke below its recent upward trajectory in late trading yesterday. The Pound index traded relatively flat yesterday into this morning ahead of Bank of England (BoE) Governor Mark Carney speaking later.
The pair moved higher yesterday as recent support for the trade-weighted Euro index fell away following the EU’s disciplinary proceedings regarding Italy’s spiralling public debt. The Euro continued its decline into early trading today ahead of the ECB policy statement and press conference later.
A combination of US Dollar selling bias and strong Eurozone Purchasing Managers’ Index (PMI) prints moved the pair higher in early trading yesterday. The Dollar then found some support following a good ISM non-manufacturing reading pushing the pair 80 pips lower than the high of the day.