Draghi avoids the tough questions, US data in focus
As broadly expected, the European Central Bank held interest rates unchanged yesterday. The marginal lending facility and the deposit facility rates will remain at 0.25% and -0.40%, respectively. Despite the euro zone enjoying solid growth, Mario Draghi didn’t change his tune as he declared that it still needs ‘significant monetary policy stimulus.’ The ECB is still expected to maintain its €2.4 trillion bond-buying program until the end of the year, while interest rates should remain on hold ‘through the summer’ of 2019. During the question-and-answer session, journalists tried to get more clarity about the significance of ‘through the summer.’ Draghi didn’t budge as he refused to provide a deadline. It shows that the ECB is eager to keep its leeway should things not turn out as expected. Finally, the central bank didn’t provide further information regarding the reinvestment process of cash from its bond-buying program. Draghi said the matter was not discussed by the Governing Council.
However, the market knew very well that the ECB wouldn’t provide further information about monetary policy tightening. The main topic of the day was trade relations between the US and the European Union. Indeed, higher tariffs by the US could dampen economic growth. Again, Draghi refused to comment – he just acknowledged it is ‘a good sign’ – and said that the ECB ‘took note’ and that it was ‘too early to assess the actual content.’
Draghi’s cautiousness triggered a broad-based dollar rally. During the press conference, EUR/USD fell more than 0.70% to 1.1640. Even the disappointing economic data from the US didn’t prevent the dollar index from surging more than 0.60% to 94.76. June durable goods orders increased 1%m/m versus 3% expected. Excluding transportation, the gauge advanced 0.4%m/m versus 0.5% anticipated. Traders will be watching US second quarter GDP growth today (forecast 4.2% q/q annualized and 2% previous), Q2 core PCE (2.2% exp.) and personal consumption (3% exp. and 0.9% previous).
Brexit negotiations with Barnier are difficult
Brexit negotiations continue with Theresa May taking control of discussions. As communicated on Tuesday in a ministerial statement, PM May has taken full responsibility for the negotiations with the EU, accompanied by Dominic Raab, her new Brexit Secretary, who replaces David Davis. Following the late-afternoon announcement, the cable surged from 1.3116 to 1.3189 the day after (+0.67%), a trend that did not last as talks with the EU continue to pose challenges for May’s Brexit team, thus creating further uncertainties with regard to the 3-month deadline related to the customs relationship with the Single Market.
Indeed, the euphoria seems to have disappeared as the pair lost intraday gains from the beginning of the week amid tough European rhetoric and a slowdown in economic fundamentals. After having agreed a Brexit white paper with her cabinet at Chequers two weeks ago, EU Commission negotiator Michel Barnier declared being unsatisfied with May’s solution for the Customs Union, one of the nerve centres of the plan, thus putting further pressure on the PM. The discussions, however, ended on a positive note with Barnier expressing support for a continued security relationship with the UK. The next meeting is expected to take place in mid-August.
The Bank of England Monetary Policy Committee will most certainly confirm market expectations and raise interest rates by 25 bps next Thursday, regardless of the recent Brexit debates. Despite a slackening in economic expansion (disappointing private consumption and wage growth), inflation remains above the 2% target. In any case, a no-go situation would threaten the GBP, which would see a drastic drop.
GBP/USD fall continues, currently trading at 1.31 and expected to decline further, as recent Brexit events can only further weaken the pair. Approaching the 1.3080 range.
