Dovish BoC paves way for today’s ECB
March 7, 2019
Sterling continues to gear up for a volatile session next week without any significant data releases this week. Market participants’ attention is firmly on the three major events, the first of which, the meaningful vote, took another blow overnight as scepticism on forthcoming concessions from the EU hit the daily newspapers. With Attorney General Geoffrey Cox unable to announce anything meaty from his meeting with EU negotiator Michel Barnier, it looks like May’s deal is heading for the same fate as January’s vote due to no modifications to the Irish border being apparent. Meanwhile, the government lost another potentially key vote yesterday as the House of Lords voted in favour of a cross-party amendment to the trade bill. The Lords voted for the UK to strike a customs union in the event of Brexit actually occurring. This just adds to Theresa May’s headache with 5 days to go until the next key vote, with EU produced paracetamol still being readily available only providing a small solace to her.
After two consecutive days of losses against the US dollar, yesterday’s flat trading session was a welcome alteration for the single currency. Today all eyes will be on the European Central Bank’s Rate Statement, Press Conference and of course the ECB’s most painful meeting with reality today; the updated Growth Forecast. The omens are dire to the extent the question is not if the current 1.7% growth forecast for 2019 will get downgraded, but by how much. We expect a growth downgrade towards the region of 1.3-1.4% for the year, which is actually still conditional on the optimistic assumption growth in the Eurozone will start to return towards long term potential growth of 0.4% per quarter. Another central question is whether the ECB will prolong, and maybe even extend its current Targeted Long Term Refinancing Operations program to provide extra liquidity to banks. We consider there is a high likelihood they will at least admit it has been discussed in the Governing Council, opening the door for announcing the extension in April if economic surprises continue to tilt to the downside. After dovish turns of other major central banks like the Reserve Bank of Australia, the Bank of Canada and of course, the Federal Reserve, the way appears paved for the ECB to follow suit. The data at least gives the ECB every justification to do so.
The Federal Reserve’s Beige Book was released last night at 20:00 GMT and highlighted the moderate US GDP growth expected at the beginning of 2019. The economic release suggested that the slowdown in the US economy was widespread and pointed towards the US government shutdown and reducing fiscal stimulus for the downturn. Despite this, the US dollar continues to roar on upwards ahead of tomorrow’s delayed labour market data release.
December’s dismal GDP data clearly played a big part in yesterday’s very dovish hold decision. The statement noted that the downturn in growth was both sharper and broader than expected, but the key phrase was the explicit acknowledgment that uncertainty about the timing of future rate hikes had increased, which all but confirms that rates will be on hold until the economy regains its mojo. This evidenced the latest G10 central banks dovish turn to a neutral stance in light of slowing growth in the economy. The loonie has today to brush off the BoC reaction prior to Friday’s labour market data.