The European Central Bank (ECB) meets today and is expected to maintain the status quo, after having twisted its monthly purchases programme at December’s meeting. Last month, the ECB announced its plans to reduce its monthly purchases from 80 billion to 60 billion euros coupled with a nine months extension in the Quantitative Easing (QE) programme to the end of 2017. ECB President Mario Draghi had carefully stressed that this was not a tapering. The ECB’s monetary policy remains accommodative, especially as the European Union steps into a challenging year.
Mario Draghi’s speech (13:30 GMT) will be the key highlight of the day. Draghi is expected to talk down the rise in December inflation and deliver a dovish accompanying statement due the pending Eurozone risks, such as the upcoming German and French elections, Greek and Italian debt and the Brexit.
Meanwhile on the other coast of the Atlantic, the Federal Reserve (Fed) prepares for a hawkish monetary policy, as the US economy is approaching the full employment and price targets, according to the Fed Chair Janet Yellen. Yellen’s hawkish comments stipulate that the Fed is moving towards a tighter monetary policy, which is broadly being factored in. The interest rates would be increased a ‘few times per year until the end of 2019’ according to Yellen; the total rise would sum up to 3%, approximately. As of today, the market is predicting three US interest rate hikes in 2017. However, it is important to note that the pace of the Fed tightening will depend on Donald Trump’s fiscal stimulus plans and could be adjusted on the go.
Either way, the fact is that the divergence between the Fed and the ECB outlook is supportive of a stronger US dollar against the single currency. Although the Eurozone’s core government bonds started the day significantly lower, amid the sharp sell-off in the US sovereigns in New York, the spread between the US and the EU sovereign yields widened significantly through the Trump triggered rally in the US markets and remains supportive of further euro depreciation against the greenback.
The EURUSD eased to 1.0622 on the back of the broad-based USD appreciation. Technically, the failure to clear the mid-term resistance at 1.0707 (major 38.2% retracement on post-Trump USD rally) could encourage a further decline towards 1.0567/1.0560 (minor 23.6% retrace / 50-day moving average).
Looking at the daily EURGBP chart, the formation of a double bottom at 0.8625 hints at a slowdown in the recent euro depreciation against the pound. The EURGBP cross is currently hovering around its 100-day moving average, 0.8668. Meanwhile, solid offers define the topside in GBPUSD pre-100-day moving average at 1.2439.
The FTSE started the day slightly downbeat, despite a positive session in the UK futures overnight.
The financial sector (+0.21%) outperformed at the open, on prospects that higher yields would increase banks’ profitability.
HSBC (+0.81%), RBS (+1.37%) and Barclays (+1.49%) were among the leading gainers in London. Even Deutsche Bank (+0.94%) which announced more job cuts wet investors’ appetite in Frankfurt this morning.