Daily Market Report - 11/03/2016
Yesterday signalled one of the most volatile days in currency markets following the ECB press conference and rate decision. As expected by markets the ECB cut deposit rates by 10 basis points further in to negative territory to -0.4% which means the ECB will be charging banks more to hold their overnight funds and thus incentivising banks and financial institutions to increase lending activity to ultimately increase economic output. This went hand-in-hand with the marginal lending rate also cut from 0.3% to 0.25% which means banks and financial institutions will be charged less for borrowing from the ECB overnight. Furthermore, Mario Draghi has also increased the quantitative easing programme by €20bn a month, bringing the asset purchase programme to €80bn from a previous of €60bn. This was expected as there was always going to be pressure on the ECB to expand their monetary policy given the single-currency bloc slipped back in to negative inflation for February. Market participants were most surprised by the cut in the ECB base rate to an all-time low of 0.0% from 0.05% amid growing concerns of a fresh economic crash - naturally off the back of this EUR depreciated across the board massively with both GBPEUR and EURUSD reflecting the negative sentiment in the Eurozone given the interest rate cut.
However, the gains made against the EUR were only momentary as in the following press conference Mario Draghi implied interest rates would stay ‘very low’ for at least another year and played down the speculation of further interest rate cuts. As a direct result to these comments; we saw EUR strength return causing EURUSD, GBPEUR and GBPUSD all dramatically retraced the previous gains made. Market participants interpreted Draghi’s comments as positive for the Eurozone as it was insinuated no further interest rate cut was required to boost economic output – these retractions was also mirrored in the equity markets. Due to the subsequent EUR strength, we also saw a bout of USD which caused GBPUSD to push higher.
In closing Draghi said without Thursday’s measures, the Eurozone would have faced ‘disastrous deflation’. The ECB is predicting inflation in the Eurozone will only be 0.1% this year, 1.3% in 2017 and 1.6% in 2018 - all under its target for inflation, close to but below 2%.
Unemployment claims for the US were printed better than forecast as the publication came out showing individuals who filed for unemployment decreased to 259K from a previous of 277K, however this data was overshadowed by the ECB meeting. Given the dual mandate operated by the Federal reserve of price stability and employment; the recent unemployment data puts the Fed in a good position to for an interest rate hike when the FOMC meet at the end of this month.
09:00 – GBP: Trade Balance, forecasted at -10.3B against previous of -9.9B
13:30 – USD: Import prices MoM, forecasted to come in at -0.7% against forecast of -1.1%