28 January 2021
The euro sold-off fairly aggressively versus its major peers on Wednesday following some unexpectedly dovish comments from a European Central Bank member.Investors were caught wrong-footed by comments by ECB member and renowned hawk Klaas Knot, who implied that the bank had room to cut interest rates further in order to stem the recent appreciation in the euro. A report from Bloomberg also suggested that ECB officials thought that the market was underpricing the possibility of an additional cut in the bank’s main interest rates. The timing of such an admission is a bit of a surprise, given that they have waited this deep into the crisis before even entertaining the possibility of further reductions in rates. While this may be a genuine consideration among policymakers, it could merely be an attempt to verbally talk down the value of the euro.EUR/USD rebounded somewhat following the sell-off yesterday afternoon. This didn’t really have anything to do with last night’s FOMC meeting, which largely went according to the script. There was very little new information to report. Chair Powell noted that there would be a moderation in activity and employment, with US inflation to be modest this year. As we anticipated, he also said that it was too early to think about tapering the bank’s asset purchases. This would ordinarily be a bearish signal for the dollar, but investors largely overlooked it, perhaps given that such comments were already almost entirely priced in prior to the meeting. Attention now turns to this afternoon’s US GDP data. We are expecting modest growth in the fourth quarter following the record expansion registered in Q3.
Pound gives back gains as investors profit-take
Meanwhile in the FX market, sterling lost a bit of steam yesterday, edging off its strongest position in eight months versus the euro. No one catalyst can be attributed to the pound’s retracement in the past 24 hours, other than perhaps investors profit-taking following the currency’s recent rally. Sterling has been the best performing currency in the G10 so far this year, largely a consequence of the impressive progress being made on the vaccination front. We are also beginning to see encouraging signs of both a slowdown in new cases and a levelling off in the number of new COVID-related deaths. Should these both continue to trend lower and the number of vaccinations continues to accelerate, then additional gains for the pound in the immediate-term are very much on the cards, in our view.
