ECB to End QE, But Growth Downgrade Sends the EUR Lower

Dec. 13, 2018 (Western Union Business Solutions)  – The U.S. dollar was mostly flat as market attention remained focused on Europe. Britain’s pound held its chin above 20-month lows after Prime Minister Theresa May won a key confidence vote which bought the U.K. unit some breathing space. The euro steadied after the ECB left its borrowing rates unchanged and announced it would retire its monthly QE stimulus at month-end. Canada’s dollar was pinned near recent lows as weaker oil prices below $51 weighed on commodity assets. The FX market will look for a catalyst today in the ECB’s post-meeting news conference. The 19-nation central bank will also unveil fresh forecasts for growth over the coming year. Any tone that plays up greater economic uncertainty would strike a dovish chord that could tighten a lid on the euro.

 

USD

 

America’s economy flashed mixed signals that proved neither a buy or sell signal for the U.S. currency. The job market turned in another strong showing as weekly jobless claims fell more than expected to 206,000 in the last week, the lowest since the late 1960s. But import prices, a key gauge of inflation, took a 1.6% plunge, the most in over three years which offered evidence of the strong greenback putting downward pressure on inflation. Lower inflation backs the view of the Fed slowing the pace of rate hikes next year, a narrative that’s dollar-negative.

 

EUR

 

The euro weakened after the ECB left interest rates unchanged and announced the end of its monthly bond buying stimulus at year’s end. The bank’s forecasts for the economy were mixed and largely offset, expecting slightly lower growth this year but higher inflation. Mr. Draghi, the president of the ECB, reiterated that the area borrowing rates wouldn’t rise until after next summer, at the earliest. Mr. Draghi’s message mostly met markets’ dovish expectations and therefore hasn’t proven a catalyst for a meaningful euro decline.

 

GBP

 

Sterling held above 20-month lows but continued to nurse losses on the week, a day after most members of Theresa May’s Conservative Party maintained confidence in her leadership. The vote showed that 200 of the 317 members of the Conservative Party maintained their faith and confidence in Mrs. May’s leadership, despite the still-uncertain road ahead for Brexit. But the fact that so many of her colleagues (i.e. 117 or more than a third of the party) expressed no confidence in the premier, it did little in inspire optimism in Mrs. May’s Brexit bill eventually passing Parliament. As long as the risk of a hard, potentially economy-damaging Brexit remains on the table, the path of least resistance appears lower for the pound.

 

CAD

 

Canada’s dollar kept close to recent 1 ½ year lows as the price of oil, a key commodity that Canada produces and exports, shed a percent to $50. Investor appetite for risk also cooled, as evidenced by Wall Street futures pointing to a subdued start to trading. For the most part, USDCAD is pinned near mid-2017 peaks as global risks outweigh expectations for Canada to remain on a path of gradual interest rate rises.


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