12/03/2021

The Euro holds firm despite a dovish European Central Bank


EUR

The Euro held firm on Thursday despite a dovish European Central Bank (ECB) meeting which saw interest rates kept unchanged but saw the ECB commit to increase the pace of its €1.9 trillion bond buying scheme.

The ECB’s decision to accelerate the pace of its PEPP for the next three months came as a surprise to markets and was an attempt by the ECB to combat rising eurozone bond yields which have been propelled higher in anticipation of higher inflation. As a result, the ECB have been forced to act in order to keep financing conditions favourable to help encourage spending which will ultimately help with growth within the Eurozone.

Whilst on the face of it, the policy decision was deemed dovish and the Euro held its ground. Perhaps the ECB’s more upbeat take on inflation increasing to 1.5% from 1% and the upgrade to the 2021 economic growth forecast kept the euro supported.

GBP

Data released by the Office for National Statistics this morning showed the U.K. economy shrank less than expected for the month of January.

Gross domestic product contracted by 2.9% after a gain of 1.2% in December as the U.K. economy was at the mercy of another Covid induced lockdown. Despite the contraction, there is room to be positive as the economy proved to be more resilient as economists had forecasted a 4.9% fall. The U.K. economy is now 9% weaker than the year previous.

In addition to this, the UK’s first set of official trade data since leaving the EU showed the damage of Brexit during January as exports and imports showed a concerning slump. According to data released by the ONS, exports to the EU fell by 40.7%, whilst imports fell by 28.8% as businesses paused trading with the EU to allow the Brexit disruption to pass.

The ONS did however caution against reading too much into the data as businesses likely paused trading due to Brexit disruptions and the tightening of Covid restrictions during this time.

For instance, a poll surveying the Institute of Directors showed that 1 in 5 who had been trading within the EU halted imports and exports in their entirety in January. Of those who had stopped trade with the EU 48% said it was temporary and 42% said it was permanent.

All eyes will now be on next week’s Bank of England decision, where the data will likely feed into any policy decision made by the central bank. At this stage, a shift in policy seems less likely as the bank will likely remain in wait and see mode as they will likely want to see if the expected economic bounce occurs following the easing of lockdown restrictions next month.

Economic Calendar

07:00 – GBP – Growth Domestic Product (MoM) (Jan) beat expectations to read -2.9%
07:00 – EUR – Harmonized Index of Consumer Prices (YoY) (Feb) expected 1.6% previous 1.6%
15.00- USD – Michigan Consumer Sentiment Index (Mar) PREL expected 78.4 previous 76.8


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