How will the ECB and BoE policy announcements impact the currency markets?

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13 September 2018

thomasdodds

The Euro jumped to its strongest position against the US Dollar so far this week on Wednesday after the EU’s chief executive, Jean-Claude Juncker, called for the Euro to challenge the US Dollar as the world’s leading currency.

S
peaking at an event in Strasbourg, Juncker claimed ‘we must do more to allow our single currency to play its full role on the international scene’, and that the Euro should become the face and instrument of a ‘new, more sovereign Europe’. Traders reversed some bearish bets on the currency from earlier in the day after reports that the ECB will revise its growth forecasts lower at this week’s monetary policy meeting. FX traders won’t need to wait long to find out, with the ECB set to announce its latest policy decision just after midday today.

As we mentioned earlier in the week, we think that the central bank will mostly reiterate its message from the previous meeting, while reinforcing its plans to begin winding down its stimulus programme from September. We could see an upward revision in the inflation forecast to reflect the weaker EUR/USD rate. We also acknowledge that there is a chance of growth outlook being slashed amid softer external demand, which could keep the Euro on the back foot today. The bank will also probably reiterate its plans to hold off on raising interest rates until deep into 2019.

BoE minutes to highlight ‘no deal’ Brexit risk

In a particularly hectic day of currency trading, the Bank of England will also be announcing its latest interest rate decision at midday on today. The bank is almost certain to keep interest rates unchanged, although the minutes of the meeting could shed some light on the MPC’s view on how a ‘no deal’ Brexit could impact the UK economy. With no quarterly inflation report this time around, there will be no updated economic projections and Mark Carney, who was announced earlier this week to be extending his stay as Governor until early 2020, will not be holding a press conference.

This afternoon’s US inflation data will round off an unusually busy day in the FX markets, with investors eyeing a modest decline to 2.8%. We do, however, think that even a disastrous number would not prevent the Federal Reserve from raising interest rates again later this month. During trading yesterday, FOMC member Brainard struck a hawkish tone on future hikes, talking up a ‘strong’ US economy and claiming that further gradual interest rate increases are likely to be appropriate over the next couple of years.