Forex analysis today. Facing up to the ECB

news_pic_5Friday’s US employment report did not lead to a sea change in the tone on the dollar. The better headline reading mean that the improved tone to risk assets remained in place, which allowed equities to close into positive territory. The positive tone is struggling to be maintained at the start of the European session, with a mixed session seen in Asia. The main focus this week is with the ECB meeting on Thursday. The price action on the euro in the run up to this meeting has been very different to that seen in the run up to the December meeting, the last time the deposit rate was cut. This time around, the single currency has been reluctant to push ahead, in part because it was wrong-footed last time by the ECB failing to live up to expectations. Furthermore, the risk averse tone to markets seen in the first six weeks of the year meant that the euro benefitted to a degree. The main expectation is that we’ll see a further cut in the deposit rate, but the impact on the currency is far from clear. Those countries that have moved either to negative rates, or cut further into negative territory, have seen their currencies increase in value, rather than move lower. The story is that as central banks move further into unconventional policies, the impact on both the economy and also the currency becomes weaker but also less predictable than was the case in the early days.

For today, the agenda is relatively quiet, so we’re likely to see a calm start to the week. We are seeing the dollar stronger against both sterling and the single currency in the early part of trading. Overall though, sterling continues to hold the better tone gained through last week, but the Brexit referendum is still hanging over the market and although that may still be some time away in June. This is likely to bear down on the currency further in the coming weeks. It’s also worth watching the oil price today, with the front Brent contract close to the USD 40 per barrel level.

Source: Simon Smith, Chief Economist FxPro.

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