By Brendan Marsh
After our tumultuous Tuesday session markets appear to have hit the pause button, seemingly moving sideways over the past 18-24 hours. A closer look though does reveal for the most part an ongoing decline for the USD on most pairings, still hurting from the implosion of US health care reform. There is in most instance further favour shown for equity indices and commodity prices.
Hesitancy before the ECB policy meeting is a factor and a possible explanation for the EUR drifting off at least half a cent through the European session. Counter to that are fresh highs for the CAD and AUD, underpinned by commodity price action, the CAD at 1.2600 (best since Q2 2016) and the AUD at 0.7960 (last seen in Q2 2015). The NZD has spent the session consolidating its advance to the 0.7350 level, trading in a 30pt range for the most part.
Markets are divided on ECB expectations. Our house view is that the ECB will remove its pledge to increase QE as it has been very deliberate in laying out its policy intentions as it gradually backs away from settings designed for deflation.
That process started with changes in the wording of their messages in late April and continued at their June meeting when Draghi upgraded the balance of risks to neutral and removed the easing bias. Removing the props in steps is an important part of the process in terms of clarity.
Comments last night from the Governor of the Banque de France (Villeroy de Galhau) noted that the central bank is adapting its intensity depending on the economic situation and inflation, this is consistent with the message from Draghi three weeks ago in Sintra that policy can be adjusted in line with the recovery. An announcement on actual tapering will we believe be made at the September meeting with QT starting in January 2018 and lasting for 9 months.
Elsewhere overnight there was a recovery in US housing starts and permits that was anticipated, while the S&P extended all-time highs buoyed by earnings reports and the energy sector.
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