Week in FX Europe – Draghi Short on QE Details Hurts EUR

• Draghi leaves rates unchanged unveils ABS plan but vague on details
• Irish Central Bank raises economic outlook
• BoE could raise rates before Fed but at slower pace

The president of the European Central Bank Mario Draghi is caught between weaker economic data and a divided European Commission. Growing deflation continues to build the pressure on the central bank to act to turn the economy of member states.

On the other hand the European governments have failed to come up to an agreement regarding austerity and how to spur growth.

At the Thursday ECB announcement there was no change to rates in the meeting this week but he announced Asset Backed Securities would start to be purchased in the final quarter of the year which was not new to the market, but failed to mention that sovereign QE measures are not on the table. ABS purchases alone will not be able to reverse the deflationary currents, but Germany is the strongest dissenter of a full blown QE strategy as it is unsure of the clear benefits to German citizens.

The EUR/USD has been weaker as both the Fed and ECB continue on diverging paths. Strong economic data and the end of the bond-buying stimulus in October have put pressure on the Federal Reserve to hike rates. The ECB is expected to act, but lacks the consensus from member states to launch a much needed QE program. The EUR has lost ground across the board and the lack of details from Draghi and a strong NFP pushed it under the 1.27 level this week. The high of the week was 1.2715 with a low of 1.2510. Current prices are close to the 1.25 price level and could fall further if the Fed’s minutes from the FOMC next week provide clear arguments for a rate hike.

Ireland’s Central Bank Raises Economic Outlook

Ireland because a poster boy for economic austerity after it was able to repay its bailout. The Irish Central Bank has improved the country’s economic outlook, but advises to keep the austerity program for fear of giving back those gains.

The forecast for growth next year is 4.5% which is almost double the 2.5% forecasted three months ago.

BoE could raise rates before Fed but at slower pace

Rate divergence has come to the forefront as different economic recovery speeds have presented themselves across the globe. The Federal Reserve in the US and the Bank of England in the UK are two of the most likely candidates to raise rates given the economic recovery. The Fed was far ahead in the market expectation until BoE Governor Mark Carney hinted that UK rates could be higher this year. He later contradicted that statement in a move that made a UK MP label him an “unreliable boyfriend”.

Now Goldman Sachs is forecasting that Carney might indeed be the first to pull the trigger. Goldman still thinks the rate of the US rate hikes will be faster. The data behind that forecast is from the Fed’s own forecasts. The individual forecasts from members see the Fed increasing rates later in the year, but ending higher at the end of 2015 which would necessitate stepper moves in the last two quarters.

Housing is a big concern with the rate of hikes as it is one of the major risks as outlined by Governor Carney. He has warned about housing overheating on various occasions and has asked the central bank for additional powers to curb the demand. The challenge here is that next year is an election year in the UK which ties the hands of the BoE in its ability to find faults with the current scheme, which may or might not have caused the bubble.

Next week in Europe

The market is not done yet with the central banks. Next week the Reserve Bank of Australia kicks things off on Monday. Despite an AUD rally of late (AUD$0.8670), the market will be expecting some dovish currency comments from Governor Glenn Stevens. It has become a regular part of his rhetoric repertoire. On Tuesday, the Bank of Japan takes center stage; in all respects Prime Minister Shinzo Abe is happy with the yen’s relative weakness of late. Wednesday will be dominated by the Federal Open Market Committee minutes. As per usual, the market will be looking for any clues to justify building on current positions. The Bank of England meeting dominates Thursday: Is Governor Mark Carney still the favorite to be the first developed nation to hike interest rates? Finally on Friday, Canada will report its own jobs report.

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