peaking at a central bank conference in Sintra, Portugal, Draghi struck a very dovish tone, stating that the ECB could lower interest rates or restart its quantitative easing programme should inflation in the bloc continue to remain well short of target. According to Draghi, there remains ‘considerable headroom’ for more QE and that ‘further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools’.

This marks a rather drastic shift in tone from Draghi that suggests the bank is much more open to altering its policy than the market had previously expected. While there appears limited scope for rate cuts given its potential negative impact on EZ bank profitability, the resumption of QE is becoming increasingly more plausible. Eurozone data continues to surprise to the downside and it is clear that the bank is wary of another blow up in global trade tensions.

Will the Fed signal US rate cuts are on the way?

This week is a very busy one in terms of central bank announcements, with attention turning to Wednesday’s heavily anticipated meeting of the Federal Reserve.

The greenback has been broadly stronger in the past week or so, despite heightened market expectations for multiple interest rate cuts from the Fed before the end of the year. While we see it as very unlikely that the FOMC will cut rates at its meeting this week, investors will be paying close attention to the bank’s rhetoric and updated interest rate projections for clues as to the possibility of easing at upcoming meetings.

With the market currently pricing in three cuts from the Fed in 2019, the bar is high and we would likely need to see a fairly significant dovish surprise in order to trigger any form of sustained downturn move in USD. The key will likely be the bank’s updated ‘dot plot’, which shows where policymakers expect rates to be at the end of each year. Given that this looks very likely to be lowered somewhat for 2019 and 2020, the extent of the downward revision will be crucial to the reaction in the FX markets.

Sterling hits new lows ahead of BoE meeting

Brexit news has continued to be the main driving force behind the volatility in Sterling in the past week or so, driving the currency to near six month lows this morning.

The emergence of Boris Johnson as the clear favourite to win the race to number 10 has concerned investors that fear his pro-Brexit stance could open the door to a ‘no deal’ Brexit should a withdrawal deal failed to be agreed in parliament. With the UK’s political climate in chaos, there also remains a very strong possibility that a general election may be needed to break the impasse, the uncertainty of which provides another stumbling block to Sterling strength.

Amid the Brexit mess, the Bank of England will be announcing its latest policy decision on Thursday. Yet, with the markets view on the Pound currently overwhelmingly bearish, even a very hawkish surprise may not be enough to trigger any form of meaningful recovery in the currency.