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Pound still on the back foot in wake of ECB QE taper timing

Today’s macro highlights:

  • EUR - ECB Forum on Central Banking
  • USD - NAHB Housing Market Index (June)

Pound still on the back foot in wake of ECB QE taper timing

It might be some time before we see a repeat of the packed schedule of economic and political news from last week, but the anticipated volatility for currency markets was delivered - and the implications will arguably have caught many off guard. It was no surprise that the Euro suffered as Mario Draghi pushed back the proposed end of ECB bond buying, but the read-across for the Pound was certainly eye-catching, with GBP/USD losing over a cent, too. Data out of the US on Friday presented something of a mixed bag, but optimism over the Michigan sentiment forward-looking indicator appears to have won out - at least for now. The Pound may be holding onto gains over the Euro, but we’re seeing no signs of a bounce back after that bout of selling against the US dollar.

We have a significantly quieter week ahead for data, with Central Bank watchers likely to be focused on the ECB’s forum which is attracting all the key players to Sintra in Portugal for the next few days. However given the key policy announcements we saw last week from both the ECB and the Federal Reserve, expectations are downbeat as to whether there will be any news of immediate consequence for currency markets here.

There’s one reading out of the US which could attract some attention at 3pm BST and that’s the National Association of Home Builders Housing Market Index for June. This is a small survey but is forward looking as to where the housing market is heading. With concern that the US economy may be reaching a plateau, weakness here will be closely followed. The FOMC may still be committed to two further rate hikes in 2018 given their comments of last week, but with the recent run of dollar strength, wavering in something like today’s print may be sufficient to see some weakness come through.

Looking further into the week, the Bank of England’s MPC meeting verdict on Thursday will attract some media narrative in the days ahead. However, with the current policy being that rate changes are coordinated with the quarterly inflation report - and the next one of these isn’t due until August - any media chatter that the Bank is being forced to hold fire yet again is arguably a little sensationalist. It’s the subtler aspects we need to watch for in the accompanying statement. Any shift in this bias could drive a meaningful short-term reaction for Pound crosses.  

The pair remains depressed after Thursday’s read across from the ECB’s call. Assuming markets continue to err towards the idea that the Bank of England may hike rates at the August meeting then potential for this pair should be seen on the up side.  

Thursday’s move lower was a brutal one for the pair. The dollar in general is buoyant, with the DXY index sitting close to 11-month highs so there is the chance of a broad-based reversion here, but any further wavering by the ECB over concluding its QE scheme has the potential to act as the catalyst for another round of Euro selling. 

Sterling is managing to hold onto the vast majority of Thursday’s gains and the general absence of UK economic data in the near term may lend further support here. That said, anything that points towards a more hawkish tone at emerging from the Bank of England will have the potential to drive this pair back toward fresh highs for the year. 

Did you know…
The Dollar Index - also known as USDX or DXY - is a calculation of the dollar’s relative value against a weighted basket of six other currencies. The Euro makes up over 50% of this basket, followed by the Japanese Yen, The Pound, the Canadian Dollar, The Swedish Krona and the Swiss Franc. It was created by the Federal Reserve in 1973, after the gold standard was abandoned. With a starting value of 100, it rose above 160 during the Latin American debt crisis of the mid 1980s and almost touched 70 at the depths of the credit crisis a decade ago. Some have suggested the basket - which was designed to reflect major trading partners - needs to be updated, with the likes of China and Mexico being included.