Draghi ends ECB tenure on a sombre note

ith a host of easing measures announced in September this month’s Governing Council meeting was always going to be a low-key one. Draghi continued to strike a dovish tone, reiterating many of the party lines that have been synonymous with his time in the job. He stated that the bank was ‘ready to adjust all instruments’ to support the Eurozone economy and that European banks should do more in the way of fiscal stimulus.

During the press conference, he also played down reports of division within the rate-setting committee regarding the bank’s quantitative easing programme, suggesting that a ramping up of asset purchases in the coming months cannot be ruled out. Despite these dovish remarks, the lack of any major new information ensured that EUR/USD ended the day only modestly lower versus the dollar.

Draghi will be replaced by the now former IMF chief Christine Lagarde. Lagarde has indicated in recent months that she is likely to ensure a continuation of the bank’s accommodative monetary policy stance. We therefore think that an increase in the bank’s QE programme in early-2020 is a real possibility, particularly should upcoming economic data continue to fall short of expectations.

Will the EU grant another Brexit extension?

Brexit remained in a bit of a limbo yesterday as the market awaited news as to the length of the extension the EU is willing to grant the UK.

European leaders commenced a behind closed doors meeting at 10am Brussels time (9am UK) this morning in order to discuss said extension, with an official response expected later today. We see two alternatives:
A short (technical) extension of 2-3 weeks – This would allow MPs more time to discuss the Withdrawal Agreement Bill in an attempt to force it through parliament in a matter of weeks. France are reportedly keen on a shorter delay.

A long extension of 3 months to 31st January 2020 – Under such a scenario, Johnson has stated he will aim to hold a general election on 12th December, in the hopes of garnering a majority that would vote in favour of his deal. Two-thirds of MPs would need to support the motion and it is as yet unclear as to whether opposition politicians are on board.

In regards to how sterling will react, typically the longer the extension the larger the rally in the pound. Yet, with an extension of three months widely expected, we may not see too much of a move in the UK currency on the news.

Dollar rallies to one week high despite soft data

Some relatively weak data out of the US on Thursday, including weak durable goods orders numbers, were not enough to discourage dollar buyers that sent the currency to its strongest position in a week.

Attention now turns to next Wednesday’s Federal Reserve meeting, in which the US central bank is expected to lower rates for the third time this year. With a rate cut around 90% priced in by the market, volatility in the dollar will likely be driven by the Fed’s comments regarding the possibility of additional cuts beyond October. We think that the Fed will disappoint and indicate a pause in the easing cycle is on the way, which may be supportive of the greenback in the back half of next week.