Morning Brief – Another datum, another dive

Charles Porter
Tue 25 Jul 2023

Another datum, another dive

We are entering the phase where politicians are obscuring their eyes behind their palms, but central bankers begin to sweat a little less. ECON101 will tell you that monetary policy is faster than fiscal policy to have an impact on the economy, but you’ll never find someone boasting about how reactive an economy is to interest rate adjustments. Whilst we’re on the topic and as I will return to it below, quantitative tightening/loosening is a quicker tool if utilised effectively but often will have limits on how much sway it can have overall upon an underlying problem. Moreover, speak of the former quantitative tightening tends to get markets in a twist as they worry liquidity will dry up. All of this being said, fast moving data globally is now suggesting that interest rates have finally bitten in, and inflation is falling. Unfortunately, growth forecasts and economic prospects are unsurprisingly falling just as fast. 

Yesterday morning, some data from the Eurozone generally regarded as relatively low salience was published. Concerning only a handful of nations within the Euro area and largely only observing the manufacturing sector, the data was still so underwhelming that it managed to drag EURUSD down nearly a cent on the day despite its usual classification. The message of growth concerns in Europe was heard loud and clear and the Euro’s downfall during yesterday’s trading session reflected both the implications of weak economic performance and shifting ECB expectations. With the latest ECB decision due on Thursday, markets know that this latest data could have some sway over the outcome of this decision.

So, onto the decision, what can we expect from the ECB this week? Despite the data, a well signalled 25-basis point hike still looks overwhelmingly likely. The data should be sufficient to eliminate any calls from the governing council for an oversized 50-basis point hike. However, the ECB still has a hefty balance sheet and some speculation regarding how the central bank looks to align this with its interest rate policy has been building. Any suggestion that the central bank may look to constrain its balance sheet, perhaps by suspending the reinvestment of maturing QE programs, could reinvigorate the Euro. However, in an environment of growing European growth concerns, this remains unlikely for now. Whilst all eyes will be watching for any deviation, there still seems to be little reason for the Euro to break recent ranges on Thursday. 

Discussion and Analysis by Charles Porter

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