Draghi comes under pressure to respond to low inflation

Despite the disappointing data out of the UK yesterday, Sterling performed strongly against its major counterparts. Consumer credit, which measures the amount of money borrowed by individuals in the previous month, came in below forecasts. February mortgage approvals also failed to live up to economists’ predictions, causing the pound to lose ground against the euro during the morning session.

The pound rallied against the US dollar during the afternoon after disappointing US data and Janet Yellen’s speech (see below) and finished the day around a quarter of a percent stronger vs the dollar. Sterling also claimed back the day’s losses from the euro as inflation figures in the EZ fell to the lowest levels since November 2009, closing ever so slightly below the market open. For now, short-term EUR & USD buyers get another bite of the apple.

Today: The market will be focusing on the Manufacturing PMI figures due out at 8:30am. Update:  UK Manufacturing PMI slides to 55.3 in March – GBP/USD follows

The euro retreated again yesterday as Draghi comes under pressure to respond to low inflation. Year-on-year CPI inflation data yesterday confirmed that inflation fell to its lowest level since November 2009 at 0.5%.

The problem for Europe at the moment is long term “ultra-low” inflation which has the potential to destroy output, hurt hiring and revive economic stimulation. The ECB needs to acknowledge having low inflation for a long time isn’t neutral. It’s bad for the economy and impedes recovery. It is imperative to return inflation to the target as quickly as possible – and – markets will be watching this week’s ECB interest rate decision and accompanying statement closely for clues of when and how the ECB expect to deal with deflationary pressure.   The lingering danger is the longer inflation remains weak, the more prone the region is to deflation, which would be harder to reverse“¦

For now, Draghi is forecasting an economic recovery will eventually lift inflation, which the ECB sees averaging 1.3% next year and 1.5% in 2016 after 1% this year. If any downside risks to this scenario appear, the ECB has confirmed they are ready and willing to take additional monetary-policy measures to ensure that this objective is fulfilled. Key releases today:

• Markit Manufacturing PMI (Euro, Germany, Italy, France, Spain, Greece)
• Unemployment data (Germany, Italy, EUR)

Federal Reserve Chair Janet Yellen addressed the public yesterday for the first time since becoming Fed chair 2 months ago, in her speech, she confirmed that the Fed would continue to provide stimulus and that a lot of commitment would still be needed to combat unemployment and spur recovery in the world’s largest economy. The mid-term forecast for the dollar still looks positive and the pressure could subside significantly if the economy keeps improving. US economic activity has picked up, and the unemployment rate has dropped from a post-recession high of 10 percent in 2009 to 6.7% last month.

For now, the Fed will continue to focus on economic data and unemployment figures rather than interest rates. The FOMC has kept the benchmark interest rate near zero since December 2008 and it’s highly expected that rates will remain where they are for some time to come. The Fed will continue to do whatever is necessary to help the nation recover”¦and put more people to work.

Morning Market Update courtesy of FC Exchange.