Market Brief: Draghi hits back

26 Jan 2018

Ian Wilson

Dealing team

The European Central Bank made the decision to leave its policy unchanged yesterday. As widely expected, the deposit rate remained at -0.40%; the refinancing rate at 0.0%; and the marginal lending rate at +0.25%. 

Today's data releases
  Key levels
09:30 UK preliminary GDP   Support Resistance
13:00 US President Trump speaks at WEF in Davos GBP/USD 1.4000 1.4365
13:30 US advance GDP GBP/EUR 1.1146 1.1511
14:00 UK BoE Carney participates in WEF panel  

Market overview

The Governing Council (GC) also left its QE programme unaltered at the pace of €30bn per month until September this year. The brief explanatory text was effectively the same as in December, with the GC emphasising for example, that it stands ready to increase QE if conditions worsen. The EUR was relatively unchanged off the back of the release with traders keeping one eye on what was always going to be a challenging press conference for Central Bank President Mario Draghi. Sticking to his longstanding message, he stated several times that nothing has really changed since October and that a number of problems still persist – notably subdued underlying inflation and euro volatility – a message that hasn’t been used since September. Turning his attention to the euros recent exchange rate gains he appeared to remind US Treasury Secretary Steven Mnunchin of international commitments to avoid competitive devaluations and that he should not be trying to drive markets away from fundamentals. Draghi said “The exchange rate has moved in part because of endogenous reasons, namely the improvement in the economy, in part due to exogenous reasons that have to do with communication. But not by the ECB, but by someone else. This someone else’s communication doesn’t comply with the agreed terms of references.” He also noted that several members of the ECB’s Governing Council expressed alarm about Mnuchin’s comments and U.S. policy which have been dominating much of the conversation in Davos. Despite this, Draghi’s failure to directly express any major concerns about developments in the foreign-exchange market and saw EURUSD briefly trade above 1.25 before retracing. 
 
U.K. Chancellor of the Exchequer Philip Hammond said there has to be “a win-win solution” for the City of London and the EU-27. Speaking to business leaders in Davos, Hammond called for an unprecedented and wide-ranging trade agreement with the bloc to mitigate the threat of “unnecessary economic, fiscal or financial stability risks” from Brexit. Feeding a growing market expectation of a soft Brexit outcome, GBPUSD rose above 1.43 capping its best performance since the referendum vote. 
 
Overnight, the dollar experienced a brief fightback as President Donald Trump told CNBC he wants a strong dollar, countermanding comments made by his Treasury secretary earlier in the week. Suggesting Mnuchin’s comments were taken out of context Trump said “the dollar is going to get stronger and stronger and ultimately I want to see a strong dollar”. Halting what was going to be the dollars sharpest weekly decline in 18 months, the Bloomberg Dollar Index was up 0.4%, GBPUSD fell more than 1% to under 1.4100 and EURUSD was flat at 1.2408. 

 

The day ahead

Expect another day of volatility with the World Economic Forum in Davos reaching its final day. Among the highlights will be Mark Carney participating in a panel discussion titled “Global Economic Outlook”. The BOE governor is said to have indicated earlier in the week that voting to leave the European Union has cost Britain more than £200 million a week in lost growth. The market will be keeping a close eye on any further remarks surrounding how much potential growth UK plc has lost due to the Brexit vote according Carney. On the data front we will get a first look at how the UK economy faired in the last quarter of 2017 with UK preliminary GDP released at 9:30. Forecasted at 0.4%, any improvement on this figure will undoubtedly increase the attractiveness of the pound. Any rally may be short lived however, as US GDP is released shortly after at 13.30.

 

Thought of the day

Everyone dreams of discovering money they didn’t realise they had – even a forgotten fiver can brighten up a day! But we have all been trumped by rapper 50 Cent who has discovered he is a Bitcoin millionaire thanks to some long-forgotten album sales. He became the first artist to accept Bitcoin as payment back in 2014 when he released his album Animal Ambition and he received over 700 Bitcoins as payment. After forgetting about them until now, he has now discovered that they are worth between $7-$8m! Of course with the crypto currency’s volatility that could change very quickly. The same can also happen in the FX markets: last night we saw an overnight swing in GBPUSD of 2 cents which have now been mostly recovered. If you would like to take advantage of any sudden dips in the market, we can place a market order or look at a Release Forward. This will give you a fully protected rate but could also release you from any obligation should we hit a certain level. Call your Investec dealer to find out more on 0800 055 6339..

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