ECB decided not to pull the trigger on the interest rate hike and lowered the growth forecast. The BOE increased the growth forecast despite serious Brexit issues
The supper interesting day is over but the effects of this can still be seen in the markets. The European Central Bank decided to hold the fire and the action was the same at the Bank of England- no change in the interest rate. What stimulated the move in the Euro against the dollar was the fact that the ECB lowered the growth forecast a little for this year and this brought the excitement for the bulls. Draghi now expects the growth in the eurozone to grow at 2% for this year and 1.9% for the next year The bank maintains its view that the growth would remain robust in the eurozone and this is despite the fact that German economic data, an economic engine of the eurozone, has started to show some weakness.
On top of this, the ECB is also confident that the inflation equation in the eurozone would continue to improve. The euro could continue its bull move against the dollar. Thus, we could touch the 1.18 handle. However, a major obstacle in the way is the protectionism polices introduced by Donald Trump which are fuelling the rally for the dollar index.
Speaking of protectionism policies, President Trump contends that there is no pressure on him to make a deal with China. Both sides need to strike a deal because the trade war isn’t in any one’s favour and it would have devastating effects. Trump is still trying to strong arm China and maintains the view that it is China which needs to come to terms with the US. This kind of posture would only escalate tension between the two major economic powers of the world and it would not lead them to any kind of peaceful resolution. This is especially true if Trump goes ahead with his plans to impose another $200 billion worth of tariffs on Chinese products. The mid-term elections are nearly on the door step and if Trump doesn’t find a viable resolution for this issue, it could have unfavourable impact.
Closer to home, concerns about Brexit are becoming more problematic for the Bank of England and this was the message that was delivered by the governor of the Bank of England. The business activity over in the UK has one clear trend; tighten the expenses and hold off any kind of expansion strategy until the future becomes certain. Despite this, the bank of England increased its growth forecast , unlike the ECB, for the third quarter to 0.5% from 0.4%. Regardless of the growth forecast, the Brexit risk are real and it would be sensible thing for the bank to touch the interest rates again until well after the Brexit period. Strong consumer spending is the only part of the equation which is supporting the economy and any further increase in the interest rates would make the consumers to dig deep into their pocket or they would have to make other cuts in their spending habits.
