Having watched Macron receive a slap to the face already this week I’m sure many of the G7 leaders were cautious of receiving theirs (metaphorically or physically) as the summit gets underway this week. Thus far, we have seen headlines that G7 leaders are drawing up plans to collectively provide a billion vaccines to the developing world to aid efforts aiming to eradicate the coronavirus pandemic for good. This focus on the provision of aid is standing in contrast with the controversy surrounding cuts to the UK’s foreign aid budget. So far, however, despite the critical debate surrounding Sunak’s decision to defend the Conservative’s economy-first mantra over the boost to its international standing that is derived from strong aid spending, GBP seems relatively undeterred from the political risks created by this decision. What GBP seems more concerned about and what is stunting the Pound’s progress is the standoff in talks between the UK and the EU surrounding Northern Ireland.
The European Union have suggested that tariffs could be imposed on UK goods, contrary to the trade agreement agreed last year. The most recent talks have ended without achieving progress, raising the profile of the ensuing G7 summit even higher. At least the last three US Presidents have prominently weighed into the debate surrounding the relationship between the UK and the EU. Past Obama’s support of the UK’s position within the Union, was Trump’s support for Johnson’s Brexit push, and now Biden’s allegiance to Ireland will usher in a new style of comment and lobbying. Comments and rhetoric surround this from, in particular, Union and UK leaders and the US President could impact GBP rapidly.
The ECB decision today comes at a time when Euro area inflation is running above its target. ECB policy can frequently be challenging to predict from a data stand point because of the fluffy definition of its inflation target. ‘Close but just below 2%’, the official wording of the ECB mandate, is a little bit like the driving directions you might receive from a very unwelcoming stranger. However, with CPI last read at 2% exactly, it is clear that the current year on year observation of inflation is in violation of their target. At present the data is insufficient to force the ECB’s hand into scrapping the policy outlook, but it could be sufficient to force uncomfortable comments surrounding the bond purchase programme(s) at the press conference. Moving into this decision due today following a two-day meeting of the ECB monetary policy committee, it is clear that members of this board are divided. If those fractures are evident within the decision and press conference, the Euro could be in for a bumpy ride higher.
Despite pockets of risk culminating in isolated events of higher FX volatility, the wider market has been relatively stagnant in the past weeks. Implied volatility in markets is back at record lows and realised volatility in major pairs has been subdued. Today’s ECB decision will be a pivotal moment in determining whether that fatigue will last in markets or whether new dynamics are building for more significant valuation changes.
Discussion and Analysis by Charles Porter