The European Central Bank made no changes to interest rates or its quantitative easing program on Thursday. As attention turned to the press conference with Mario Draghi, President of the ECB, he stated that inflation pressures in the EU remain subdued and that the ECB will look through any near-term inflation pickups.
Draghi stated that there is still little sign of increases in shop prices and workers’ wages, which is a symptom of economic weakness. The rise in the annual inflation number to 1.1 per cent in December is still well below the target of two per cent and is largely due to the increase in oil prices. As a result EUR/USD pushed lower, before recovering losses overnight on the back of a weaker US dollar.
Where next for GBP?
GBP came off the 1.2400 level this week having failed at a tough resistance level. For the short term it makes sense to try and lock in as much of this week’s gain as possible. 1.2420 had previously been a tough level to break and proved so again on Wednesday. Having benefitted to the tune of 300+ pips on Tuesday, it would be prudent not to give back any more of that gain than is necessary. 1.2300 stands out as an area where a significant and pivotal price action has been seen over the last 30 days, and was the high last week.
US dollar softer overnight
Recent rallies in both the US dollar and equities are taking a breather before Donald Trump steps into office. Markets may be beginning to lose faith that Trump will follow through on pro-growth campaign promises and look to be taking a wait and see approach for now. The Dow Jones declined for the fifth successive day, the longest streak since Trump’s victory and the US dollar index was down 0.2per cent, despite setting a new 10 year high earlier this month.
Janet Yellen, chair of the US Federal Reserve System, helped to further weaken the dollar saying it is prudent for the Federal Reserve to gradually adjust interest rates over time. Speaking at the Stanford Institute for Economic Policy, Yellen maintained that the Fed aren’t behind the curve in containing inflation pressures but still cannot allow the economy to run too hot. This may have been an attempt to contain market expectations of interest rate hikes after saying on Wednesday that the US economy is close to the central bank’s objectives of full employment and stable prices and stating she’s confident it will continue to improve. Futures markets are currently giving a 50 per cent chance of another interest rate increase in the US by May. This has seen both the Pound and Euro open higher against the US Dollar yesterday.