How did the euro react to Thursday’s ECB meeting?
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Thursday’s European Central Bank meeting was largely a non-event for currency markets.
Probably the main talking point among investors prior to the meeting was whether or not Lagarde would ramp up concerns regarding the recent strength of the euro. She again stated that FX appreciation was providing a drag on inflation and that the bank would ‘closely’ monitor the exchange rate, although this was almost a carbon copy of her remarks from December. The lack of a more forceful talking down of the currency is likely to have been behind the reaction in the euro, which edged modestly higher versus the dollar during London afternoon trading on Thursday.
The common currency also received decent support following the release of this morning’s business activity PMIs. While the composite index fell short of expectations, strangely enough both the services and manufacturing PMIs came in better-than-expected, albeit still showed an overall contraction in activity in January.
Sterling holds its own as investors focus on vaccine progress
The pound slipped slightly this morning and is now back trading where it was at the beginning of the London session on Thursday following a rather dismal set of UK retail sales and PMI numbers.
Retail sales barely grew in December (+0.3% month-on-month) as a result of the various tiered systems in place across the whole of the country. The outlook for January is even worse given the national lockdown currently in place – the preliminary services PMI sank to 38.8 this month, well below the 45 consensus and its lowest level since May.
Currency traders are, however, continuing to largely turn a blind eye to the dire short-term economic outlook and the continued rise in UK virus deaths in favour of the remarkable progress being made towards mass vaccinations in Britain. There is a general feeling among market participants that the UK may be able to start unwinding its virus restrictions quicker and to a greater extent than its regional peers off the back of this progress. According to Our World in Data, the UK has now administered 8 COVID-19 vaccine doses per 100 people, having last week alone administered the jab to 2 million people.
With no major macroeconomic news out of Europe this afternoon, attention will turn to the US. We will be keeping tabs on today’s US PMI numbers, as well as a speech from the newly inaugurated President Joe Biden.