ECB vs. US Q3 GDP – What Matters More to EURUSD?
Buckle your seatbelts because the next 24 hours will be a busy one for the foreign exchange market. There are two monetary policy announcements, German labor market and inflation numbers scheduled for release along with the third quarter U.S. GDP report. Between the Bank of Japan and European Central Bank meetings, the ECB is the only one to watch. Although growth and inflation forecasts could be revised higher, the BoJ’s hands are tied. No changes are expected from the ECB either but with the Fed gearing to taper next month and the Bank of Canada surprising with a sudden end to their quantitative easing program, investors will be watching closely to see if the ECB moves in that direction.
When they last met in September, the ECB scaled back its massive bond buying program slightly to reflect an improved economic outlook but made it clear that they are not tapering. However with inflation soaring to a 13 year high and other central banks admitting that some price increases could be more permanent, ECB President Lagarde will feel compelled to ease inflation concerns (or not!). Short term rates have also skyrocketed, which is a sign that investors expect less accommodation from the central bank. So while no changes are expected from the ECB on Thursday, it will be difficult for Lagarde to escape influencing market expectations through her comments on inflation. If she insists that price pressures are transitory and downplays the recent increase, euro could resume its slide. However if she admits that some prices could stay high for longer or there’s a growing risk that price pressures will not descend quickly, we could see significant short covering in the currency.
U.S. Q3 GDP will be released just as ECB President Lagarde begins her press conference. Initially currencies will move almost exclusively on the pace of U.S. growth. Economists are looking for a significant slowdown from 6.7% to 3% which is consistent with the lowered growth forecasts from Atlanta Fed. Recent earnings reports show U.S. businesses thriving in the pandemic recovery but retail sales and trade weakened in Q3. Ten year Treasury yields plummeted on Wednesday, falling the most in one day since July 19th on the back of a decline in durable goods orders. The U.S. dollar was surprisingly resilient, due in part to safe haven demand. The Dow Jones Industrial Average lost over 200 points today.
The big story today was Canada. To everyone’s surprise the Bank of Canada announced an early end to the Quantitative Easing program and pulled forward their forecast for rate hikes. As the first major central bank to taper, Canada is at the front of the policy normalization pact. According to Governor Tiff Macklem, “we’re getting closer to a full recovery….we don’t need QE anymore.” They also expect rates to remain at 0.25% until Q2 or Q3 of 2022 which is slightly more aggressive than their earlier second half forecast. The Canadian dollar soared in response.
Managing Director of FX Strategy BK Asset Management