Spectrum FX Daily Market Update
What to expect from Thursday’s ECB meeting
This Thursday’s meeting of the European Central Bank is expected to be uneventful for the FX market, but will be closely watched by investors nonetheless.
At the March meeting, the ECB stepped up its efforts to rein in rising European bond yields and support the economic rebound in the common bloc by announcing it would be front-loading the pace of purchases under its emergency pandemic asset purchase programme (PEPP). Since the March meeting, risks to the Euro Area economy have remained finely balanced. On the one hand, macroeconomic data has been largely resilient and there is now broad optimism surrounding the EU’s vaccination programme. On the other, virus cases have risen again and many nations in the bloc have either extended or reintroduced tougher lockdown measures.
With this in mind, we expect President Lagarde to state that the outlook of the bloc’s economy remains ‘broadly balanced’. We also think that the Governing Council will reiterate its commitment to maintaining a greater pace of asset purchases in Q2, and see little risk of a return to the previous 60 billion euros a month level until either the June or September meetings. Regarding the future of the PEPP, we think that it is far too early for the bank to begin discussing policy normalisation, particularly given Euro Area inflation remains well short of target. The reaction in the market is, therefore, likely to be relatively muted.
Dollar claws back losses amid spike in virus cases in Asia
Prior to tomorrow’s ECB meeting, the euro consolidated some of its gains, having jumped back above the 1.20 level versus the US dollar during Asian trading on Tuesday morning. The surge in new virus cases in parts of Asia, and indeed around much of the globe has caused investors to favour the safe-havens once again in the past 24 hours. While the general view towards the vaccine rollout around the world is an upbeat one, it remains the case that most nations have not yet vaccinated enough of their populations for restrictions to be unwound materially without leading to an increase in fatalities. India, for instance, has seen caseloads and deaths skyrocket in the past few weeks, while Japan has tightened restrictions following another uptick in rates of infection. The vaccine rollout has shown now more than ever that the COVID-19 pandemic will not be overcome until every country has rolled out vaccines to the masses, which still remains some way off despite the impressive progress made in a number of developed nations.
GBP/USD also retraced some of its gains this morning, opening London trading on Wednesday just above the 1.39 level. There has been a handful of data releases out of the UK so far this week, although market participants have largely continued to overlook economic news in favour of pandemic developments. Tuesday’s jobs data was pretty encouraging - the jobless rate dropped to 4.9% in the three months to February, below the 5.1% that investors had priced in. Yet, with almost 5 million people still enrolled on the government’s furlough scheme at the beginning of the year, we will still not really get a true read on the state of the labour market until later in the year when financial support schemes are wound down and the economy is reopened.
Investors will now be keeping one eye on the latest PMI and retail sales numbers out on Friday, both of which have the potential to shift sterling this week.