Draghi's Cautious Tone Weighs on Euro

Pound Sterling – UK Markets

The British pound extended its recovery climb into a second straight day on Thursday and finished the day higher against both the euro and the dollar. However, this move seems more like a correction of the sell-off that started in November and is unlikely to deepen unless it’s supported by political developments.  

Germany’s EU commissioner Günther Oettinger reaffirmed the EU’s position by saying that there can’t be any further negotiations on the Brexit agreement. Furthermore, citing a draft document, Reuters reported that the EU was not open for renegotiations and intended to proceed with the ratification of the Brexit agreement. Meanwhile, British Brexit secretary Barclay told reporters that a second referendum would be difficult due to the time it would take and legal requirements and added that the UK government would try to get the legal and political assurances on the backstop. On the other hand, a government spokesperson said that depending on the progress with the EU, the Parliament could vote on the deal as early as next week but later changed that statement by explaining that there wouldn’t be a vote before Christmas.

US Dollar – US Markets

With the euro having a difficult time finding demand following ECB President Draghi’s remarks, the US Dollar Index, which tracks the greenback’s value against a basket of six major currencies, erased its losses in the second half of the day.  

The weekly data published by the U.S. Bureau of Labor Statistics on Thursday revealed that the number of citizens applying for unemployment benefits fell to 206,000 in the week ending December 7 from 233,000 recorded in the previous week. Other data showed that the export price index and the import price index declined 0.9% and 1.6%, respectively, on a monthly basis in November. “Despite the November drop, import prices increased 0.7 percent over the past 12 months, the smallest over-the-year advance since the index increased 0.2 percent from November 2015 to November 2016,” the BLS said in its publication.

 Euro – European Markets

In a widely expected decision, the European Central Bank announced that it kept its main refinancing rate, which determines the cost of credit in the economy, the deposit rate, and the marginal lending facility unchanged at 0%, -0.4%, and 0.25% at 0.25%, respectively. Additionally, the bank confirmed that the QE programme will come to an end following December purchases despite the recent dismal macroeconomic indicators. During the press conference, ECB President Mario Draghi said that inflation readings were weaker than expected but the underlying strength of the economy continued to fuel their confidence in inflation. Furthermore, Draghi stated that the balance of risks was moving to the downside and that he saw “somewhat slower growth momentum” ahead. Regarding the timing of a rate hike, Draghi noted that they haven’t discussed it during the meeting. Draghi’s cautious tone put the shared currency under a heavy selling pressure and the euro erased the majority of the gains it recorded vs the dollar on Wednesday and continued to weaken against the British pound.

In the meantime, the Destatis’ inflation report showed that the CPI in Germany rose 0.1% on a monthly basis in November to keep the annual rate unchanged at 2.3%, which was in line with experts’ forecasts.

On Italy-related headlines, European Commissioner for Economic and Financial Affairs, Pierre Moscovici, told reporters that Italy had made a significant effort on its budget and added that the meeting with the Italian economy minister was very constructive.
What’s coming up?

UK: There won’t be any macroeconomic data releases from the UK on Friday and markets will stay focused on the political headlines.

US: Industrial production, retail sales, business inventories, capacity utilization, and the IHS Markit Manufacturing and Services PMI data will be featured in the U.S. economic docket on Friday.

EU: The IHS Markit will publish the preliminary December Manufacturing and Services PMI reports for the euro area and Germany on Friday. Additionally, the Eurostat will release the third quarter labour cost figures.