ECB to hold policy steady, reiterate quantitative easing end

o change in policy is expected from the ECB, with President Draghi likely to reiterate the bank’s plans to end its quantitative easing programme at the end of the year. We will instead be paying close attention to his comments over inflation, namely whether the central bank has any confidence that core inflation will begin to trend towards target in the coming months. Following yesterday’s very soft business activity PMIs, the composite index of which fell to a 26 month low in September, it will also be interesting to see whether he alters the language on the growth outlook.

The bank’s rate announcement at 12:45 will be followed by Draghi’s press conference at 13:30 UK time.

Pound slides to seven week low on Brexit worries

Sterling was also firmly on the back foot on Wednesday, falling to its lowest level against the US Dollar in seven weeks. Investors remain concerned over the possibility of a ‘no deal’ Brexit, while there is also been fresh speculation that Theresa May could face a leadership challenge amid the fiasco over the Irish border negotiations.

In the US, FOMC member Robert Kaplan stated that the central bank should raise interest rates on two or three more occasions before evaluating whether further increases in the main rate would be warranted. Fellow central bank members Mester and Clarida will be speaking this afternoon. We will also look out for today’s durable goods order data, although this may well be overshadowed by the ECB’s announcement.

Canadian Dollar soars after BoC interest rate hike

The biggest mover in the G10 yesterday was the Canadian Dollar, which rose sharply after the Bank of Canada hiked interest rates, as expected, while hinting that it is ready to hike at a more aggressive pace next year.

The bank’s main policy rate was raised by another 25 basis points to 1.75%, the bank’s fifth hike since mid-2017, with its statement much more hawkish than the market anticipated. Policymakers talked up the ‘solid’ global economic outlook, noting an ‘especially robust’ US economic performance. Inflation in Canada is also now expected to remain close to the bank’s 2% target through to the end of 2020, with the bank stating that higher rates will be needed in order to achieve the inflation target.

Of most significance, however, was the dropping of the terms ‘gradual’ and ‘cautious’ with regards to the bank’s future rate hike approach, suggesting that the BoC may be moving towards a slightly more aggressive pace of future hikes. This reinforces our view that the Canadian Dollar will be one of the better performing G10 currencies against the US Dollar in the coming year. The BoC is the only other major central bank, with the exception of the Federal Reserve, to be engaging in a full on hiking cycle.