The BoE and ECB to Put the GBP and the EUR under the Spotlight

Earlier in the Day:

Economic data through the Asian session included November employment figures out of Australia, China’s retail sales, industrial production and fixed asset investment numbers and Japan’s finalized October industrial production figures.

For the Aussie Dollar, there was some more positive data this morning, with full time employment rising by 41.9k in November, following an upwardly revised 31k in October. Total employment was also on the rise, increasing by 61.6k, following a 7.8k rise in October. The unemployment rate held steady at 5.4% in spite of the participation rate rising from 65.2% to 65.5%, which was another positive for the Aussie Dollar and could provide hope for a much needed pickup in wage growth in the coming months.

The numbers come off the back of the upbeat December consumer sentiment figures that had been released on Wednesday.

The Aussie Dollar moved from $0.76295 to $0.76595 upon release of the data. At the time of writing, the Aussie Dollar was up 0.38% at $0.7666, with $0.76 levels having been recaptured following the release of the FOMC economic projections on Wednesday.

Out of China, November industrial production rose by 6.1% YoY, easing from October’s 6.2%, while fixed asset investments increased by 7.2%, rising at the same rate as in October. Retail sales edged up from October’s 10% to 10.2%. All in all the data suggested a steady economy, easing concerns over an end of year slowdown. The figures did little to the markets however, with the PBoC’s decision to lift short-term rates being the surprise of the morning.

For the Yen, the damage was done following the release of the FOMC economic projections, with the Yen rising to ¥112 levels against the Dollar, off the back of falling U.S treasury yields on Wednesday’s. The stronger Yen weighed on the Nikkei this morning. Japan’s finalized industrial production figures were in line with prelim, rising by 0.5% in October and doing little to the Yen, which was down 0.08% to ¥112.63 against the Dollar at the time of writing.

The equity markets were largely in the red through the Asian session, with the ASX200, CSI300 and Hang Seng also in the red at the time of writing.

The Day Ahead:

It’s a big day ahead for the EUR, with plenty for the markets to consider ahead of the ECB monetary policy decision and press conference this afternoon.

Macroeconomic data out of the Eurozone this morning includes prelim private sector PMI figures out of France, Germany and the Eurozone, together with finalized November inflation figures. Inflation continues to be the ECB’s bugbear and, while we won’t expect the finalized numbers to have too much of an impact on the EUR, any hints of a pickup in private sector input and output price pressures could be a positive for the EUR ahead of the ECB announcement.

We have heard from ECB President Draghi previously of an anticipated pickup in inflationary pressure, which has yet to materialize. As pricing pressures ease across the private sector, supported by continued momentum in the economic recovery, he might just turn out to be right.

At the end of the day, direction for the EUR will ultimately be hinged on the ECB decision and press conference. While there are no expectations for a shift in policy towards deposit and interest rates, any hints of a look to review interest and deposit rates would certainly give the EUR a boost. The markets will also be looking for any upward revisions to economic growth and inflation forecasts that will also be of influence this afternoon.

At the time of writing, the EUR was up 0.05% at $1.1832 with direction through the early part of the day coming off the back of the FED’s monetary policy decision and economic projections, with today’s ECB press conference the main event.

For the Pound, it’s yet another important day on the data front with the UK’s November retail sales figures scheduled for release. Forecasts are for a pickup in retail sales, which will be a positive for the Pound, though any upside may be limited as the markets look ahead to the BoE’s monetary policy committee meeting and outlook on monetary policy through next year.

As things stand, the softer wage growth numbers and higher than expected inflation figures suggests that the BoE may need to reconsider its neutral position, but the Bank may argue that there will need to be some time to allow the shift in policy to feed through to consumer prices. Brexit has ultimately been of greater influence to the Pound than macroeconomic data and monetary policy and this will likely be another factor for the BoE to consider.

While there are no expectations of a move this afternoon, the vote count and the meeting minutes will be key for the Pound.

Thrown into the mix today will be the EU Summit on Brexit, with the markets needing to consider EU sentiment towards progress on Brexit and whether talks can move ahead to trade talks. Any negative comments will weigh on the Pound irrespective of the BoE’s outlook on policy.

At the time of writing, the Pound was up 0.13% at $1.3437, with the softer Dollar given the Pound some respite following the news of the Brexit deal vote late on Wednesday.

Across the Pond, October business inventories, November retail sales figures together with December’s prelim private sector PMI numbers will be in focus. Retail sales and service sector PMI numbers will be the key drivers through the afternoon from a data perspective.

The markets will also need to consider progress on the tax reform bill, with further details likely to be released through the day on an apparent deal.

We’ve seen the Dollar on the back foot following the Democrat’s victory in Alabama and the tax reform bill could be Trump’s last chance to deliver on a campaign pledge, with the U.S President having failed to bring the Republican Party together to deliver on campaign pledges.

At the time of writing, the Dollar Spot Index was down 0.04% to 93.383, with today’s stats key for the Dollar. The FED may have been on the dovish side, cornered by soft inflation, but positive numbers will support the continued upbeat outlook on the economy.