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ECB 'on hold' expected

Published: Thursday 06 June 2019

  • ECB 'on hold' expected
  • Peterborough by-election watched with dread by main parties

The US Dollar tried to stage a reversal overnight after an initial selloff, but thus far the upside for the Dollar is limited and there is no confirmation of the GBPUSD exchange rate having found its bottom end just yet. There were a couple of factors behind the move. A decline in the ADP employment data was largely counteracted by better than expected ISM service sector data. In particular, the employment component of ISM service improved notably by 4.4 to an index reading of 58.1. Tomorrow's non-farm payroll report may not be as bad as ADP suggests. Also, while more Federal Reserve officials expressed their openness to interest rate cuts, that situation remains very fluid. 
The economic data doesn’t point to any reversal in the improving employment trend or the buoyant economy just yet. The Inflation outlook subdued but not deteriorating. President Trump’s tariffs threat to Mexico is a significant risk to the economy , however, assuming those tariffs are imposed, the impact on inflation is unknowable right now. Additionally, even if there is no agreement between the two countries on the issue of migration flow, US Congress could challenge Trump’s tariffs and block the move. For now, it’s probably too early to be overly bearish on the US Dollar even though, technically it’s not doing very well.
The high-level meeting between US and Mexico on migration ended with insufficient progress. Trump tweeted that “Progress is being made, but not nearly enough!” He threatened again “If no agreement is reached, Tariffs at the 5% level will begin on Monday, with monthly increases as per the announced schedule. The higher the Tariffs go, the higher the number of companies that will move back to the USA!” It is a fair ambition but not a certainty.
The ECB interest rate decision is the main focus for today. The central bank for the Eurozone is widely expected to keep their benchmark interest rate at 0.0%. Their marginal lending facility rate and the deposit facility rate will be held at 0.25% and -0.40% respectively. The forward guidance that interest rates will “remain at their present levels at least through the end of 2019” would likely be untouched too. The weak growth and inflation outlook for the nations of the Eurozone will likely be reflected in the new economic projections to be released today. The question is whether ECB President Mario Draghi will shift to a more dovish tone in the press conference.
In the UK the residents of Peterborough go to the polls today in a crucial by election which will test the nerves of both major parties. Nigel Farage’s Brexit party have a realistic opportunity for their first ever MP in a constituency which supported Brexit by 61% in the referendum in 2016. A Brexit party win would add further pressure on the next Prime Minister to pursue a clean break from the EU. Sterling will remain sensitive to the result and for now still looks like a sell on any rally.
On the data front, Germany will release factory orders, the Eurozone will release the final calculation of GDP growth for the first three months of 2019 and employment data and later in the day, Canada will release their trade balance and the Ivey Purchasing Managers Index. The US will release trade balance data, the weekly jobless claims and non-farm productivity stats. All are potentially influential.
And it is of course the 75th Anniversary of the D Day landings on the beaches of Normandy in 1944; an extraordinary military and logistical undertaking that caught the Nazis napping and heralded the end of their campaign to subjugate Europe. It is impossible not to be moved by the veterans of that campaign and their stoicism as well as their humble embarrassment at being referred to as heroes and as brave. Truly they were a very special breed and we should all be forever grateful to them and their fallen comrades in arms. We very definitely will remember them.

My wife asked me why I speak so quietly when I am in the house. 
I explained that I am worried Mark Zuckerberg might be listening. 
She laughed. 
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