ECB's Nowotny signals first rate rise in EU since 2014

11 Apr 2018

Shaun Garrett

FX Dealing team

Bank of England member Ian McCafferty, one of the two members to vote for a rate rise last month, told Reuters yesterday that the MPC ‘... shouldn’t dally when it comes to tightening policy’.

Market overview

Bank of England member Ian McCafferty, one of the two members to vote for a rate rise last month, told Reuters yesterday that the MPC ‘...shouldn’t dally when it comes to tightening policy’. He also said that there was no longer any slack in the UK’s labour market and that with unemployment being low, skills shortages and firms having to pay higher wages to hire staff would lead to inflationary pressure. Although he said that he could not be sure on whether to vote again for a rate rise until May’s meeting, the markets took this commentary as positive pushing GBPEUR to the 1.1500 handle and the futures market now has a May rate rise probability of 86.4%.
 
The US dollar remained out of favour on Tuesday, despite easing US-China trade tension, and lifted the EURUSD pair to a two-week high level of 1.2378. The shared currency got an additional boost after the ECB Governing Council member Ewald Nowotny told Reuters that the European Central Bank would end its bond-buying program by the end of this year. Nowotny also called for the ECB to start a gradual approach by lifting the deposit rate, which has been in negative territory since mid-2014. ‘I would have no problem with moving from -0.4 percent to -0.2 percent as a first step and then, as a second step, include the (main refinancing) policy rate.’ The ECB however released a comment to suggest that Governor Nowotny’s views are his own and that they did not necessarily represent the view of the Governing Council.
 
On the economic data front, both the headline US PPI and core PPI came in higher than expected but did little to provide any meaningful boost to the collar. PPI YoY figure came in at 3%, 0.1ppt better than anticipated and 0.3% for the month of March, 0.2ppt better than expected. GBPUSD has scaled close to 200 pips in the last three trading days and could take out the 200-week moving average (MA) hurdle of 1.4240 in a convincing manner if the UK production data impresses. The USD bulls face a more critical test today when the latest consumer inflation figures and minutes from the last FOMC meeting are released. The minutes would be closely scrutinised to assess the extent of Fed hawkishness and might eventually turn out to be the next big fundamental catalyst, driving sentiment surrounding the Dollar in the near-term

The day ahead

We have an action-packed calendar for today after a quiet week so far, as markets eagerly await the UK data dump for fresh trading impetus. The UK sees the releases of the industrial and manufacturing production alongside the goods trade balance figures. Also, the UK’s NIESR GDP estimate will be reported at midday. In Europe ECB President Mario Draghi's scheduled speech might provide some short-term trading impetus during the European trading session. In the US, March’s consumer price index report due on the cards at 13:30 London time, followed by the EIA crude stockpiles data. In the American afternoon, the US Federal Reserve’s minutes of the March monetary policy meeting will be published, which is expected to have a significant impact on the US dollar trades going forward.

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Thought of the day

Last night Roma pulled off a sensational comeback after overturning a 4-1 against Barcelona in the first leg. Barcelona were heavy favourites after the first leg but crumbled in what was a brilliant showing from the Italian club. While Roma were buzzing all over the pitch chasing lost balls, Barcelona looked half asleep, as though they were heading out for a gentle evening stroll while they decided what they wanted for dinner. The pound is on a very good run at the moment and seems to have an element of the Barcelona performance about it. However markets have pretty much priced in a Bank of England rate hike next month, although recent economic data from the UK has been a little inconsistent. If you would like to discuss what might happen to the pound if Carney & Co seemingly change their minds please call the Investec Dealing Desk on 0800 055 6339.

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