Sterling Bulls Need Some ECB Help

  • Focus remains on Greece and ECB
  • EUR pares weekly gains on service PMIs
  • U.K. services stumps sterling
  • Pound bulls look to Draghi for help

The current forex climate is a trader’s dream. The intraday price volatility knows no bounds. Currencies remain at the mercy of any headlines out of Greece where its creditors grapple with presenting a “non-ultimatum” set of guidelines, while Athens insists it has made “tough compromises” with only a few days left before the first International Monetary Fund €300-million payment is due.

Then there is the Federal Reserve’s rate normalization timing — which is data dependent — and this Friday’s king of economic releases, the nonfarm payrolls (NFP), is expected to go a long way to help fixed-income traders nail down the possible timing of the Fed’s first rate hike along their yield curve. Plus, there are always the questionable sustainable growth worries and global inflation concerns to keep the speculative investor interested – stakeholders have been looking to this week’s non-manufacturing and service purchasing managers’ index (PMI) touch points for clues.

Today, aside from Greek event risk, the single currency moves (€1.1110) will be dictated by the European Central Bank (ECB) and whatever President Mario Draghi may say at his press conference after the central bank’s formal rate announcement (it is expected to keep rates on hold). The majority of the market does not expect the recent surge in the EUR to be long lasting. Dealers still expect Draghi to reiterate that the ECB intends to carry out its quantitative easing (QE) program in full until at least September of next year – dealers will be looking to the ECB’s inflation forecasts for support. Any dovish comments or further evidence of sustainable interest rate divergence will be expected to limit the EUR’s rebounds. Draghi committing to buying government debt for longer requires the central bank to print fresh cash – and much more of it will only weaken the EUR and favor the export-driven region.


EUR Pares Gains Amid Weaker Peripheral PMIs

The EUR is trading slightly lower this morning after a raft of final PMI services data showed the eurozone’s economy slowed less severely than first estimated last month (53.6 versus 53.9). Notably, activity among France’s services providers picked up. Of late, the routine has been that the eurozone’s second-largest economy tended to be a slight drag on the final composite numbers. However, this time it was the peripheries, and Italy in particular. Despite recording its fourth month of consecutive growth, Italy’s service sector slowed in May to 52.5 from 53.1. Even with new orders slowing, Italian businesses remain sufficiently confident in hiring additional staff for the fourth consecutive month. Obviously the biggest concern to euro policymakers is inflation, and notwithstanding the service sector facing higher input costs, providers again cut their prices, albeit at the slowest pace in 18 months.

One of the ECB’s main goals is to lift the inflation rate back to its target of just under +2%. Obviously today’s data would suggest that the ECB’s QE program is showing early signs of success and reason enough why Draghi should be guiding investors to price in completion of the program (September 2016). Nevertheless, today’s surveys do indicate that economic growth has not picked up in the second quarter after the first quarter’s slight acceleration, and therefore should have no impact on inflation, except perhaps for the ECB to reassess its inflation forecast predictions.


UK PMI Services Miss Weighs on Sterling

The last of the U.K.’s PMI readings arrived this morning to show how robust Prime Minister David Cameron’s consumer-led recovery really is, and it massively disappointed the markets. So much so that sterling lost a near full cent (£1.5270) within minutes of the services PMI release.

Forecasts were for a slight decline to 59.2 from 59.5, but trepidation with regard to last month’s general election appears to have weighed on consumer sentiment. The final print was a rather dismal 56.5. Economic prints like this will be an obvious blow for any ‘hawk’ advocating a pre-2016 Bank of England rate hike. The pound has been a rate differential favorite on the EUR cross (€0.7290) and was expect to scoop toward the psychological €0.72 handle if U.K. services beat forecasts. Now, however, the markets bear witness to a near half penny cross rise to €0.7304 (its 100-DMA and yesterday’s high). Sterling bulls will be relying on Draghi for some relief, at least to help some of their positional pain costs.

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This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell