Mario Draghi and his team opened the door to an interest rate cut later this year. The European Central Bank identified the economic outlook as getting ‘…worse and worse.’ As a result, the bank are prepared to provide increased monetary stimulus in an attempt to salvage the mild recovery seen over the past few years.
It’s highly likely the central bank will implement a deposit rate cut in their September meeting. The deposit rate is already at -0.40% and represents the price to commercial banks to deposit funds securely with the ECB overnight. In essence, the central bank charges these banks to hold their money, this is expected to incentivise them to lend the funds to private individuals and companies with the aim of stimulating economic growth. Draghi’s performance was a sombre one and one which he will be disappointed by as it did not have the intended impact on the euro he’d have hoped for. The euro initially sold off on the 1245 announcement but was bid up into the press conference and throughout it. On balance, the central bank are still split when it comes to a cash interest rate cut and still require time to find consensus, as a result, the imminent threat is removed thus producing the reversal.
Today’s economic calendar sees focus shift across to our friends in the US. It’s time for another GDP report, this one reflecting activity in the 2nd quarter. This is a preliminary reading so will provide us with the most volatility due to its high potential to diverge from expectations. Forecasts are for a drop to 1.8% annualised. This is coming from Q1’s reading of 3.1%, a significant fall by any standard. The print will cross the wires at 1330 and should provide some volatility throughout the dollar crosses.
Have a good weekend.
Written by Viv Savani. 8:26am, July 26th 2019
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