The European Central Bank (ECB) has taken decisive action to counter a sharp slowdown in the eurozone economy, implementing its first back-to-back interest rate cuts since the 2011 euro crisis.
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In Europe, consumers have lowered their inflation expectations to the lowest level in almost three years, indicating that the ECB is nearing success in controlling prices.
Some broad dollar strength was seen in the markets yesterday with EUR/USD falling from 1.0870 to around 1.0805 throughout the day.
The pound has remained stable at the start of this week as the UK’s General Election approaches, with a Labour majority widely expected according to polls and bookmakers so it will just be how big the win is that will be of interest.
Data on Thursday showed that the US economy grew at a slower pace in the first quarter than initially reported,
The pound has had a solid start to the week with it rallying versus both the US dollar and the euro, recouping the losses seen earlier in the month.
Some ranged movement has been seen across most currencies with momentum building in certain currencies across the board. The US Dollar index is seen to be potentially weaker in the current climate. While the Euro has gained again slightly against the US Dollar from Wednesday’s losses. Markets view the Euro could well test 1.0950 -1.1000 in the near term however may not have enough interest to keep it there. The Euro holds the momentum gained in the Asian session against the US Dollar and Pound Sterling, ahead of the eurozone PMI data due for release and the minutes of the European Central Bank later.
The US Treasury yields have been hovering around crucial support levels. Whilst the German yields also remain lower with room to fall further from here and test their support level, it’s viewed however a fresh rise in the German Yields could be possible. The 10-year is looking vulnerable to drop further while the 5-year GOI looks mixed, and range-bound.
Inflation in the Eurozone has declined more than forecast in recent months, raising investor expectations that the European Central Bank will cut the rate soon. However, European Central Bank President Christine Lagarde said on Tuesday that the central bank has time to assess how inflation develops after a record streak of rate hikes. The conversation regarding rate cuts is too early, keeping EUR/USD volatile.
European CPI flash estimate fell further, data showed on Friday, but core CPI edged higher. Much of the rise can be explained by German base effects, it was service inflation hit a new high and continues to worry the ECB. June CPI year-on-year retreated from 6.1% down to 5.5%, with core increasing 0.1% over the same period. EUR/USD bounced on the news, taking the currency pair back up to 1.0925, but weakened against the Pound with GBP/EUR seeing highs at 1.1655. The US also had inflationary headlines on Friday, releasing the core PCE price index which measures goods and services targeted towards and consumed by individuals. There were no surprises on the release, falling month-on-month from 0.4% to 0.3% as forecast. GBP/USD touched 1.2719 ahead of the release and is a little softer for today’s open.
A US bank holiday tomorrow, with 4th July celebrations taking place. However, this doesn’t prevent the heavy-weight data expected from the US this week as markets anticipate the latest FOMC meeting minutes on Wednesday. US jobs data follow on Thursday and Friday. The Bank of England’s Governor Bailey is also due to speak on Friday. The USD will likely see volatility over this week.
Eurozone inflation has entered a new phase which could stay for some time, requiring the ECB to keep policy tight and avoid declaring an end to rate hikes, President Christine Lagarde said on day two of the ECB Forum on Central Banking, in Sintra, on Tuesday.
Lagarde emphasized, “we are committed to reaching inflation goal come what may.”
It was Lagarde’s first public speech following the weak business PMI and IFO sentiment data which aggravated concerns about the health of the bloc’s economy. Germany’s 2-year and 10-year bond yield curve inverted the most in nearly 31 years on the downbeat economic data. Money markets are pricing around a 4% peak in the ECB deposit rate, predicting the European Central Bank interest rate cuts after they reach their peak.
Eurozone inflation data is released at 10am which will be a key indicator on the upcoming rate hikes from the ECB.
Yesterday the Bank of England rose interest rates by 0.5bps to 5% which came as a surprise to the markets as May’s inflation proved to present persistent within the UK economy. The Pound rose sharply before retreating down moments later following the announcement, showing that the pound suffered from economic slowdown fears despite the rate hike from the BoE.
Early Friday morning the pound defended 1.2700 against the US Dollar and 1.1640 against the Euro, following the upbeat UK Retail Sales data. UK Retail Sales rose 0.3% in May vs. -0.2% expected and 0.5% previous. Core retail Sales which strip’s fuel sales, increased 0.1% month on month vs -0.3% expected and 0.7% previous figure. The annual UK Retail Sales decreased 2.1% in May versus -2.6% anticipated, along with April’s 3.4% decline while the Core Retail Sales dropped 1.7% versus -2.1% anticipated reading and a -3.0% previous.
The US Dollar gained momentum in the second half of the week. Dollar strength is seen mainly on the back of speculation for further tightening by the Federal Reserve, the likelihood of a further 25bps at the next US Federal Reserve meeting in July remains high elevated by the US employment data and prices. Fridays sentiment around the US Dollar remains in focus ahead of the Eurozone PMI’s, French, German and UK PMI data due for release early in the morning. Poor figures out from the Eurozone could help keep the US Dollar and pound elevated against the Euro to finish the week.