Signs of a slowing global economy has been repeatedly present in economic data, forcing central banks around the world to adopt a more supportive monetary policy stance. Today, the European Central Bank (ECB) will update its current interest rate and forward guidance—a procedure of suggesting future monetary policy actions based on current conditions. Futures markets are unsure how the ECB will act and are pricing in a 38% chance of a rate cut today. The more likely alternative is to wait until September for a 10bps cut. We expect the ECB to update its forward guidance to add the option of lower rates in the coming months as well as including unconventional policies to add stimulus.
Yesterday’s data increased pressure on the ECB to act sooner as the German Manufacturing Purchasing Managers’ Index (PMI) recorded its weakest reading in seven years, enhancing concerns of an upcoming recession. Consistent poor data out of Europe has also added pressure on the Euro, currently trading at its weakest level in two years. A surprise rate cut from the ECB today would likely add to this, pushing the common currency to fresh lows.
Bottom line: Mario Draghi enters his last few months in the role of ECB President at a time when questions over the effectiveness of monetary policy are being raised. With interest rates already zero or negative in the Eurozone, other measures of stimulus may be needed to avoid recession. If the ECB acts sooner and policy fails to materialise into stronger fundamental data, incoming ECB President, Christine Lagarde, may have to introduce other measures, such as fiscal stimulus.
Yesterday, Boris Johnson stamped his authority on the planned change of direction for the UK government by culling 18 of the 29 Cabinet Ministers. He moved to bring senior Brexiteers into key roles with the aim to deliver Brexit in just over three months. Sajid Javid became Chancellor of the Exchequer, Priti Patel landed the role of Home Secretary, and Dominic Raab is the new Foreign Secretary. Johnson will meet with his new Cabinet today before addressing the House of Commons later.
There are a couple of ways to look at this move, but considering May was constantly at war with her own Cabinet over Brexit, no-one can blame Johnson for his substantial overhaul. Conservative backbenches are now stacked with MPs like ex-Chancellor, Philip Hammond, who are committed to fighting a no-deal. This means Johnson may have to go through with his threat to suspend Parliament or consider calling a general election to seek a greater majority.
Bottom line: Johnson’s new Cabinet reflects his staunch commitment to take the UK out of the EU on October 31st. We know that Corbyn’s Labour Party will look to call a vote of confidence in Johnson, but it’s unlikely to happen before the Parliamentary recess begins today. With Parliament not due back until September 3rd, it’s unlikely we’ll get much positive news in the coming month to provide Sterling relief.
The Pound has found support in recent days following Boris Johnson’s appointment as Prime Minister. Johnson’s policies as PM and Brexit headlines will continue to be the Pound’s driving force. The currency pair has tested the low 1.25’s in recent sessions and is likely to take something more significant from Johnson to keep above the 1.25 resistance level.
The pair is nearly two cents off last week’s lows and can keep climbing today as an expected dovish ECB updates monetary policy. In combination with UK political developments, the pair may test the 1.1270 resistance level from mid-June.
The Euro is under pressure as the ECB is expected to be dovish in today’s monetary policy announcement. Already trading near two-year lows, an interest rate cut can send the pair further to the downside, especially as recent Dollar strength continues to pull the Dollar Index closer to year-to-date highs.
All content is written by the Global Reach Trading Desk. The opinions expressed are not the view of Global Reach Group and are not intended as investment advice.