Daily Market Comment – Euro skids lower ahead of ECB; pound lifted by Johnson spending pledge

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XM Market Review
XM Market Review
  • Euro struggles near two-month lows as ECB decision is awaited
  • Pound bounces higher after new prime minister signals big spending increases
  • US dollar clings onto gains as Wall Street hits another record and trade talks make headway

Euro mired by Eurozone doom and gloom

Following yesterday’s poor Eurozone PMI readings, there was little support for the European common currency on Thursday as investors anxiously awaited the outcome of the European Central Bank’s monetary policy meeting later today. The euro was headed towards fresh two-month lows and was last trading at $1.1130 as traders bet that the ECB will signal some form of policy easing when it announces its latest decision at 11:45 GMT.

Futures markets are pointing at odds of about 50% that the ECB will lower its deposit rate by 10 basis points today and a cut is fully priced in for September. But even if the ECB was to meet the markets’ very dovish expectations, there’s doubts as to how much lower Eurozone government bond yields can go, hence, the scope for further downside for the euro may be more limited than what the short-term technical picture suggests.

Nonetheless, the euro is bound to hit turbulence when ECB chief Mario Draghi begins his press conference at 12:30 GMT as a surprise loosening of policy cannot be ruled out at today’s meeting and even if there’s no change, investors will be eager to get a taste of what to expect at the September meeting.

Boris Johnson energises the pound

The British pound was energised by the new UK Prime Minister Boris Johnson’s complete cabinet overhaul on Wednesday and pledge to increase spending even as he positioned himself for a showdown with the European Union, heightening the prospect of a no-deal Brexit.

Johnson promised more spending on schools, policing and social care, while hinting at changes to the tax system. The prospect of a fiscal stimulus would be a welcome boost for the British economy at a time when global growth is slowing, and the Brexit uncertainty is weighing on UK business investment.

The pound recovered from its trough around $1.2425 to briefly climb above $1.25 before easing to around $1.2475. But traders are likely to remain cautious going forward as Johnson’s new cabinet is made up almost entirely of Brexiteers, indicating he intends to take the country of the European Union by October 31 with or without a deal.

Dollar holds firms ahead of key data

With the first expected Fed rate cut since the financial crisis just days away, the US currency continued to outshine its rivals as the weak euro lifted the dollar index to near two-month highs. Even against the yen, the dollar held close to the 108 level as positive headlines on the trade war font and a strong performance on Wall Street supported the greenback.

The S&P 500 and the Nasdaq closed closed at record highs yesterday, boosted from a surge in tech stocks, which offset disappointing earnings results from industrial heavyweights such as Caterpillar. Meanwhile, the White House said on Wednesday that Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer will travel to Shanghai next week to hold the first face-to-face talks with their Chinese counterpart since negotiations broke down in May.

But with the US manufacturing sector not being immune to the resulting downturn in global trade, the Federal Reserve is expected to press ahead with rate cuts in the coming months regardless of whether trade talks get fully back on track. IHS Markit’s manufacturing PMI for the US hit a 10-year low in July, putting even more focus on today’s durable goods orders due at 12:30 GMT and tomorrow’s preliminary GDP print for the second quarter for better clues about the health of the world’s largest economy.

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