After boosting bond buying in Q2 and Q3, the ECB will slow purchases in recognition of more favourable financing conditions.

After boosting bond buying in Q2 and Q3, the ECB will slow purchases in recognition of more favourable financing conditions. Lagarde denied this was a tapering. The overall statement and rhetoric were close to expectations, limiting market reaction.

Overall risk conditions were slightly more confident on Friday with some relief over the US-China rhetoric. Wall Street equities retreated on Thursday, but futures posted gains on Friday. Asian equities posted significant net gains as overall risk appetite held firm.

The dollar overall edged lower in subdued conditions with a lack of defensive support. EUR/USD posted only slight gains to around 1.1830 with little support on the crosses. Sterling secured net gains despite weaker than expected GDP data as low global interest rates underpinned confidence with GBP/USD near 1.3850. Commodity currencies posted net gains despite reservations over growth trends.

In media comments ahead of the New York open, Atlanta Fed President Bostic stated that recent negative data has likely pushed back the start of tapering and that he does not foresee a decision on slowing asset purchases at this month’s policy meeting. Nevertheless, he also noted that the potential of tapering bond purchases this year remained open. He also stated that he was looking for an interest rate increase in late 2022.

The ECB made no changed to interest rates following the latest policy meeting with the main refi rate held at 0.0%, in line with expectations. The overall PEPP bond-buying programme was left unchanged and due to run until March 2022. Purchases will, however, be reduced from the rate seen in the past two quarters due to an improvement in financing conditions. Bank President Lagarde described this as a recalibration of stimulus for the next three months. She added that the PEPP debate will be handled comprehensively at the December policy meeting. The rate of purchases will slow from EUR80bn per month, but no precise amount was announced with markets expecting a rate of EUR60-70bn.

There was little change in growth forecasts for the next two years while President Lagarde was broadly optimistic over the outlook with comments that slack in the economy is being eliminated faster than expected. Inflation forecasts were revised up slightly with a projected rate of 1.7% for 2022 from 1.5% previously, but Lagarde still expected that most of the inflation pressures would be transitory.

The Euro edged higher following the ECB policy decision, but struggled to gain any significant traction and the overall reaction was muted. Commodity currencies gained ground which curbed dollar support and EUR/USD settled around 1.1825. Narrow ranges prevailed on Friday with EUR/USD close to 1.1830.

The dollar was unable to make headway ahead of Thursday’s New York open with USD/JPY dipping below the 110.00 level.

Markets continued to monitor Chinese developments closely with a rescheduling of Evergrande debt payments helped protect risk appetite to some extent.

Initial jobless claims declined to a 17-month low of 310,000 in the latest week from a revised 345,000 previously and below consensus forecasts of 335,000. Continuing claims declined slightly to 2.78mn from 2.81mn, although slightly above market expectations. The data overall maintained confidence in the labour-market outlook.

The dollar, however, was unable to gain significant support and USD/JPY settled around 109.80 at the European close.

Chinese policies remained a significant focus in Asia, especially with a lack of economic data. There were further reservations over the battle against disorderly capitalism. Asian equities posted gains on Friday, however, with President Xi and US President Biden pledged to have a serious dialogue, manage competition and avoid conflict between the two countries. USD/JPY edged higher to 109.90 while EUR/JPY traded close to 130.00.

Sterling was resilient in early Europe on Thursday and gradually gained support during the day. A GBP/USD break above the 1.3800 level helped trigger further net buying. The UK currency gained an element of support from expectations of a tight labour market with a latest survey of employers recording the tightest labour market in history. There was also further evidence of skills shortages and upward pressure on wages.

Markets also considered that there may have been an over-reaction to higher taxes while global central banks remained committed to very supportive policies. Overall, GBP/USD advanced to highs just above 1.3850 while GBP/EUR rallied to 3-week highs around 1.1730.

UK GDP growth for July was held to 0.1% compared with expectations of 0.5%. Other data was mixed with weak construction output offset by a rebound in industrial activity. Immediate reaction was limited with GBP/USD close to 1.3850 with GBP/EUR edging higher to 1.1720.

Economic Calendar

07:00GBP Industrial Production (Y/Y)(AUG)3.00%8.30%
07:00GBP Industrial Production (M/M)(AUG)0.40%-0.70%
07:00GBP Manufacturing Production (M/M)(JUL)0.10%0.20%
07:00GBP Manufacturing Production (Y/Y)(JUL)6.00%13.90%
07:00GBP Trade Balance(AUG)-11.00B-11.99B
07:00GBP Trade Balance Non EU(AUG)-7.10B
07:00Germany CPI (Y/Y)(AUG)3.90%3.80%
07:00Germany CPI (M/M)(AUG)0.00%0.90%
07:00Germany Harmonised CPI (M/M)(AUG)0.10%0.50%
07:00Germany Harmonised CPI (Y/Y)(AUG)3.40%3.10%
07:45Industrial Output MM(JUL)0.50%
09:00Industrial Output YY WDA(JUL)13.90%
09:00Industrial Output MM SA(JUL)1.00%
10:30European Central Bank President Lagarde Speaks
11:00The Eurogroup Meeting
13:30USD PPI (Y/Y)(AUG)7.30%7.80%
13:30USD PPI (M/M)(AUG)1.00%
13:30USD PPI Ex Food & Energy (Y/Y)(AUG)6.20%
13:30USD PPI Ex Food & Energy (M/M)(AUG)1.00%
13:30CAD Employment Change (M/M)(AUG)94.0K
13:30CAD Full Employment Change(AUG)83.0K
13:30CAD Unemployment Rate (M/M)(AUG)7.50%

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.