Euro interest rate expected unchanged
The European Central Bank’s monetary policy statement, to be published at 1.45 pm today, is expected not to change rates. It is expected to end Quantitative Easing, bond purchases of EUR 15 billion per month. Further tightening is unlikely, as the Eurozone outlook is distressed. With Brexit uncertainties, the Italian budget battle and an upcoming French budget deficit, the central bank will downplay these risks and maintain forward guidance unchanged. (Italy’s PM Giuseppe Conte and European Commission President Jean-Claude Juncker finally came up with a government budget deficit of 2.04% instead of prior 2.40%.) The ECB will have to reduce the monetary tightening sometime, most certainly as of next year. The loss of momentum could force the ECB to postpone its first rate hike to 2020, as the world economic outlook is not in good shape.
We expect a positive view from ECB Chairman Draghi’s speech at 2.30 pm. Currently trading at 1.1385, EUR/USD is expected to weaken slightly following Draghi’s speech.
No confidence in the pound
Although UK Prime Minister May survived a vote of no confidence yesterday, which boosted the cable 1.58%, the pound is still in negative territory week-to-date (-0.33%). The March 2019 Brexit deadline remains, and the UK parliament is likely to reject the current withdrawal agreement. The only upside for sterling would be announcement of a better deal after May’s next meeting in Brussels: this remains highly unlikely.
Yesterday’s vote showed the chaos of the Conservative Party. 117 votes against May lost to 200 supporters. May had no break: she headed to Brussels to get a better deal on the Irish backstop, particularly the clause stating that a hard border between Northern Ireland and the UK would be triggered if no deal is agreed between the UK and the EU.
