Monex Europe : The euro reached its weakest point against the US dollar since November yesterday, as fears of the impact of Coronavirus on the Chinese and global economy continued to reverberate through financial markets……….
Ranko Berich Responsable de Análisis de Mercados en Monex Europe
Today’s main data for the eurozone will be German inflation, which will be released as always throughout the morning, with the nationwide release scheduled at 13:00 GMT. Data released earlier this morning showed Germany’s unemployment falling by 2000 in January, despite the deep slowdown in the nation’s manufacturing sector.
The dollar continued to firm yesterday despite the FOMC striking dovish tones over the spread of the coronavirus as the US yield curve also dropped. Last night the Federal Reserve kept rates unchanged at 1.5-1.75% with tweaks to the monetary mechanism.
The FOMC lifted the Interest on Overnight Excess Reserves by 5 basis points, allowing the effective rate at which banks borrow from one another to trade up to 5 basis points higher to 1.6%, and also outlined that open market operations would continue at least through April such that ample reserves are in the banking system.
Governor Powell denied claims that the Fed’s purchasing of short-dated Treasuries qualified as quantitative easing and reiterated the Fed would continue to purchase them at a rate of $60bn a month, but now at a higher rate of 1.55% until ample reserves of around $1.5trn at a minimum are in the system. The tweaks in the IOER rate and overnight reverse repo rate are in order to drag short-term rates to the centre of the range after they broke the upper bound in September of last year.
Many see the consistent tweaks of the IOER rate as a signal that the Fed is losing control over short-term interests rates as the policy review comes to an end in the coming months. While this is all interesting, it had little spillover into FX markets but Governor Powell’s concerns over coronavirus and its impact on global growth spurred bets that the central bank will embark on another 25 basis point rate cut in 2020 despite official forecasts suggesting they’ll remain on hold. Today see’s the advanced reading of Q4s GDP data released at 13:30 GMT.
Sterling traded lower again yesterday and continues today’s session in the same vein with the most divisive Bank of England policy meeting this afternoon at 12:00 GMT. Options markets are split almost 50/50 on whether the Monetary Policy Committee will cut rates by 25 basis points in order to mitigate against any downturn in the economy or hold at 0.75%.
Commentary by voting members Vlieghe and Governor Carney thus far this year has pointed towards a more proactive bank that could face a potential Brexit related downturn in the economy with limited ammunition before the zero lower bound is hit. However, last week’s flash PMIs provided the hawks with some ammunition to argue that business uncertainty has lifted somewhat post-election and the economy will begin to rebound.
Today is Governor Carney’s last meeting before Andrew Bailey takes over. Papers are discussing his tenure and whether he truly was the “unreliable boyfriend” due to conflicting guidance and actions or whether his vote today will reflect dovish commentary seen just a few weeks ago. Regardless of the decision itself, sterling is likely to be volatile as the forward guidance measures are picked to pieces.
If the Bank doesn’t decide to cut, market participants will instead move expectations to later meetings, depending on the tone of the Governor in his press conference at 12:30 GMT, until data suggests otherwise.
The Canadian dollar continued to weaken yesterday as its US counterpart firmed on risk-off sentiment and oil markets dropped after a build in US inventories.
There was a brief spike in crude markets after reports of a Houthi missile attack on Saudi Arabia, however, this proved short-lived. WTI closed out the day 1.2% lower and continues to weaken to levels not seen since October 2019 this morning.
Today, the data calendar highlights a speech given by the Bank of Canada member Beaudry in Quebec on monetary policy and financial vulnerabilities at 20:15 GMT. The CFIB Business barometer is also released at 11:00 GMT.