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Mounting speculation over end to QE cheers Euro

Today’s macro highlights:

  • EUR - Eurozone revised GDP (Q1)
  • USD - Consumer credit (April)

Mounting speculation over end to QE cheers Euro

Indications continue to emerge that the ECB will be discussing the timetable for ending its bond buying initiative at next week’s monetary policy meeting. This is providing meaningful support for the Euro, with EUR/USD forging its way back to the 1.1800 level. The ECB is certainly ensuring the market is full briefed ahead of next week’s event, but the risk is that anything coming up short of expectations will serve to quickly unwind at least some of these gains, although given the strength of yesterday’s Eurozone PMI readings, there’s certainly justification for central bank action to mitigate mounting inflationary pressures.

We have a relatively quiet day ahead and given the hawkish rhetoric that’s emerging from the ECB right now, there can be no real expectation that the amendment to the Q1 GDP figure due at 10am BST will serve up any surprises. Despite the distractions of political change in both Italy and Spain, the ECB has been keen to play down the fact this may have any policy implications, suggesting that the risk to the GDP print may well be a modest upward revision.

We have a relatively quiet day across the Atlantic, too, although the April consumer credit reading due at 8pm BST will provide some fresh indications over confidence in the retail sector. Americans are having to face up to the fact that interest rates are ticking higher, plus there’s a degree of uncertainty as to just how the new approach to trade will map out. The DXY dollar index is maintaining the downward trend that’s been in play since the start of the month, but a notable jump in consumer borrowing could help at least slow this decline.

Fundamentals from the UK have been relatively thin on the ground over the last few days, although arguably the bigger consideration for the domestic economy should be how next week’s Brexit vote will map out. This covers the amendments proposed by the House of Lords, although with detail still lacking over customs arrangements, it can be no real surprise that GBP/EUR is struggling to post gains. Notable gains are being posted against the dollar, although this is more about a receding dollar than it is about sterling strength.

The pair is around two and a half cents off the lows hit in the latter part of last month although further gains may meet with resistance around the 1.3500 level. It seems inevitable that there will be some political statement over the weekend regarding Brexit - Theresa May has stated the government is looking at two options for the customs model, so any further detail here could well prove beneficial for the Pound. 

Those hawkish tones from the MPC continue to lend support to the common currency, with EUR/USD returning to levels from mid-May. Next week’s ECB meeting will remain very much in focus with the market now expecting to see news of when QE will come to an end, with the potential to drive the pair back towards the May highs of 1.2000. However, the potential for a stand-off between Brussels and Rome over the spending plans of the Italian government still shouldn’t be ignored. 

The Pound is losing ground over the Euro, with the pair now trading back where we were before the services PMI print was released on Tuesday. The absence of any fresh UK economic data and uncertainty over what happens next in the EU divorce process has the potential to continue weighing on the pair in the short term, especially if we get no further indications over how the Bank of England will act in the August policy meeting.