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Timothy Fox - Head of Research & Chief Economist
Mohammed Al Tajir - Manager, FX Analytics and Product Development
Published Date: 21 July 2019
Central banks will be in the spotlight in the coming fortnight, with the ECB due to meet this week and the Fed in the following one. While most of the attention is on the Fed’s FOMC meeting on the 31 July and on whether they will cut interest rates by 25 or 50bps, the chances are that the ECB will preempt them by trimming rates this Wednesday if only by 10bps from their current -40bps. This could briefly bring the EUR lower, and may antagonize the White House in the process, but it will probably only be a temporary effect if the FOMC meeting lives up to expectations next week and cuts rates by more.
Alternatively the ECB may decide to wait until September when it updates its economic forecasts and produces a more comprehensive raft of stimulus measures, including more asset purchases and ways to limit the impact of a negative deposit rate. With Mario Draghi’s term as President of the ECB ending in October, and with economic conditions deteriorating, it seems certain that he will want to go out proactively rather than leaving key policy decisions to his successor Christine Lagarde.
As far as expectations about the Fed are concerned, these gyrated at the end of last week between thoughts of a 50bps rate cut and the more standard expectation of 25bps. After two Fed speakers appeared to suggest a 50bps cut was likely, the subsequent rowing back of this by the New York Fed would seem to leave 25bps as the likeliest outcome, a viewpoint we would share. With the Fed now entering a blackout period ahead of the FOMC meeting, this is probably the last public word on the subject. Meanwhile the economic data calendar this week includes the advance report of US Q2 GDP which is expected to have slumped to 1.6% y/y from 3.1% in Q1. While this is now largely historic, it will at least demonstrate the economic argument for making what many see as an ‘insurance’ cut in rates.
The other main event this week will be in the UK where the new Conservative Party leader and Prime Minister will become known. Former Foreign Secretary Boris Johnson is the widespread favorite to succeed Theresa May, and his success will bring renewed concerns about Brexit as Johnson has been much more vocal in supporting a ‘no deal’. While this on its own is a concern to markets, it also brings attendant risks that the government will fall forcing a general election. For both of these reasons GBP remains vulnerable, and has only pulled back slightly from the 1.2380 lows reached last week. It is becoming increasingly difficult not to imagine that the GBP will revisit the lows it reached after the Brexit referendum in 2016, when it fell to as low as 1.1752, with even some conjecture that a move towards parity cannot be ruled out in the event of an unstable Brexit.
Source: Bloomberg, Emirates NBD Research
Economic Calendar for the week
GCC Credit Weekly