The euro rose higher on optimism that the ECB would soon taper its QE program while the dollar dropped on weak economic data and as another major hurricane is set to hit the United States.
In the day’s most anticipated event, the European Central Bank refrained from changing policy although some analysts were expecting an announcement regarding the tapering of its asset purchase (QE) program. Despite the dovish outcome, euro/dollar rose sharply, rising north of 1.20 to 1.2058, just shy of the previous week’s 1.2069, which was its highest level since December of 2014. Trading in the pair was volatile today, moving between 1.1920 and 1.2050.
During the press conference that followed the announcement, ECB President Mario Draghi warned against excessive volatility in the euro as he showed some signs of displeasure from the recent surge in the single currency. The market pretty much ignored Draghi’s concerns and pushed the euro higher. Euro/pound also rallied to only briefly pierce the 0.92 mark but dropped back to around 0.9175. The euro also rose to trade above the 131 level against the yen, in a broad move higher for the currency.
Draghi also upgraded the ECB’s growth forecast to 2.2% this year (from 1.9% previously), while also downgrading the inflation forecasts of the next two years – to 1.2% and 1.5% for 2018 and 2019 respectively. While promising to keep the 60 billion euros a month pace of QE steady until the end of the year, Draghi said there would be an update on what would happen to QE next year when the ECB next meets in late October. This probably more than anything set off speculation that tapering would be announced during that meeting and gave the euro bulls an excuse to push the currency higher (together with the growth upgrade).
The dollar was today’s easy target for the strong euro. In an indication of the distorting impact of Hurricane Harvey on US economic statistics, weekly initial jobless claims climbed to 298 thousand compared to 236 thousand the previous week. According to analysts, US economic statistics during the next 2-3 months will be influenced by the storm and with Hurricane Irma also closing in on Florida, the impact of hurricanes could be pronounced during the last four months of the year. The hurricanes are expected to have only a temporary impact on the US economy but they could also make the Fed’s task of raising rates again this year tougher. The dollar found little support from the previous day’s surprise deal between President Trump and Congressional Democrats for a 3-month extension of the Treasury’s debt ceiling combined with aid for hurricane victims.
The dollar was under pressure against the yen as it dropped to around 108.60, while the pound climbed to briefly trade above the 1.31 level against the greenback. This was a fresh 1-month high for pound/dollar. The loonie, which made significant gains after yesterday’s Bank of Canada rate hike but then returned a portion of those gains, managed to slightly take out those lows of USD/CAD today as it traded at 1.2137 – a 27-month low.
The remainder of the US session and Friday’s Asian session will be busy in terms of Fed speakers as Mester, Dudley and George will be speaking. New York Fed President Bill Dudley’s speech will be closely looked at as he may give hints on what the Fed chair Janet Yellen is thinking ahead of the September 19-20 rate-setting meeting.
In commodities, gold rose to as high as $1347 an ounce –a 1-year high- as the precious metal took advantage of the dollar’s weakness and the uncertainty over North Korea’s possible new missile test over the weekend. Oil was a little lower at $48.86 a barrel.
