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ECB to announce policy decision, Canadian Dollar soars after rate hike

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7 September 2017

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

This afternoon’s monetary policy announcement from the European Central Bank is being eyed as a major event risk in the currency markets this week.

espite an overwhelmingly dovish message out of the most recent meeting in July, currency traders latched onto President Mario Draghi’s comment that a discussion on the bank’s quantitative easing programme will take place ‘in the autumn’. This stoked speculation that policymakers in the Eurozone would use today’s meeting to announce a reduction in its amount of monthly asset purchases.

However, with core inflation stuck at just 1.2% and sources claiming that the ECB is wary of a stronger Euro, the market is now overwhelmingly expecting Draghi to hold off until either the October or December meetings before announcing a tapering of the QE programme. We think there is a good chance the European Central Bank could disappoint the market today and see risks to the Euro as skewed to the downside. The interest rate decision will be released at 12:45 UK time followed by Draghi’s conference at 13:30.

Prior to today’s main event, the Canadian Dollar jumped by over a percent-and-a-half on Wednesday after the Bank of Canada caught the market completely wrong footed by unexpectedly raising its benchmark interest rate for the second time in less than two months. Against the consensus of the vast majority of economists, ourselves included, the BoC raised rates by another 25 basis points to 1%, citing surprisingly strong growth in the second quarter.

While the bank reiterated that future interest rate moves “are not predetermined”, there is now a decent chance the BoC could follow up with another hike as soon as October should economic news continue to surprise to the upside. The Bank of Canada currently remains the only major central bank, other than the Federal Reserve, to be in the process of raising interest rates.

Pound hits fresh one month high, US data disappoints

Sterling continued to march higher against the US Dollar yesterday, following up its best daily performance in almost two months on Tuesday with another session of solid gains. With the latest economic data out of the UK fairly uninspiring, investors reversed some bearish bets against the currency ahead of parliament’s discussion of the EU repeal bill. Currency traders will be hoping the bill debates provides any morsel of clarity over the progress of the Brexit process that has been lingering over the UK since negotiations began in earnest earlier in the year.

Elsewhere, the US Dollar index sank to its lowest level in over a week, largely due to its sharp depreciation versus the Canadian Dollar. Economic news out of the US did little to support the greenback yesterday. The latest non-manufacturing PMI was a disappointment, coming in at a below forecast 55.3 versus the 55.8 consensus. Yesterday’s services PMI from Markit also slowed, although printed a respectable 56.0 in August. With all attention today on the ECB’s monetary policy announcement, the US Dollar will be driven almost exclusively by news out of Frankfurt.