Eurozone domestic demand may provide an olive branch for ECB doves tomorrow
March 6, 2019
After a fairly choppy session yesterday, sterling closed almost flat on the day against the US dollar while making further inroads against the single currency. Yesterday, the UK Attorney General and Brexit Secretary met with the EU’s Chief Negotiator, Michel Barnier, ahead of next week’s second meaningful vote in an attempt to strike legally binding modifications to the Irish backstop. Speculation over a lack of progress rose as the EU Commission and UK Government both refused to provide readouts from the meeting. Currently, sterling is trading under the assumption that May will lose next week’s meaningful vote but the degree of such a loss varies as each story breaks. Most of the speculation currently centres around how May will whip her party under the threat of ministerial resignations.
The single currency couldn’t match the level of play from the Ajax vs Real Madrid game and ended up in the bottom half of the G10 currency pack, despite hopeful signs from the domestic demand side of the Eurozone economy. Both January Retail Sales and the February Final Services Purchasing Manager Index outstripped the forecasts, lending some tentative support to the thesis that consumers and domestic demand may take the ailing Eurozone economy by the hand. Still, the Services PMI only stands at 52.8, which points to a mere stabilisation of Eurozone growth at a lower level. There are definitely no signs of acceleration just yet. Today has no significant Eurozone data coming out, which gives markets the opportunity to prepare well for the European Central Bank meeting tomorrow, which is accompanied by a press conference and fresh economic forecasts – which are likely to be downgraded.
The dollar continued to rally yesterday across the board, with SEK the only notable exception, to post a 5-day winning streak. Yesterday saw the release of Services and Composite PMIs for February surprise to the downside in the US, evidencing the preliminary signs of the highly anticipating slowdown in growth for Q1. Today we might have further signals with the ADP employment change in February at 13:15 GMT and the December trade balance at 13:30, expected to have contracted from prior readings. The Organization for Economic Cooperation and Development is also set for the publication of its interim economic outlook today. Last September the OECD warned about a peak in the economic expansion, so wisdom might urge market participants to take heed to what it has to say today as well.
The loonie struck its fifth consecutive day of losses against the USD ahead of today´s Bank of Canada rate decision at 13:00 GMT. Markets continue to price in the big miss in GDP released at the end of last week, with no rate hike foreseen for the rest of 2019. In addition to keeping on hold the policy interest rate at 1.75%, Governor Stephen Poloz is highly expected to throw a fresh new wave of patience for monetary policy to return to its neutral path. Negative risks are weighing strongly on the Canadian economy at the moment, with the global slowdown and the low oil prices impacting the highly growth-sensitive export sector while the depressed housing market is failing to prompt the economy domestically.