Draghi sells a balanced approach
Fiona Cincotta January 24, 2019 5:06 PM
The ECB voted to keep policy unchanged. The prelude to the ECB rate announcement was disappointing data showing that Germany’s manufacturing sector tumbled into contraction in January.
The ECB voted to keep policy unchanged. The prelude to the ECB rate announcement was disappointing data showing that Germany’s manufacturing sector tumbled into contraction in January. The German PMI falling to 49.9 highlights the extent of the slowdown in Europe’s largest economy. Eurozone PMI’s also surprised to the down sides.
Given recent weak data and inflation reading at just 1.6% a dovish Draghi was what the market was expecting. And a dovish Draghi is what the market got. Inflation forecasts were downgraded and risks, Draghi said, “had moved to the downside”. A significant move away from the central banks “broadly balanced” view on the outlook on the eurozone data.
Citing geopolitical risks and protectionism, Draghi’s warning that near term growth will likely be weaker than previously anticipated, sent the euro to a month low versus the dollar. The pair hit $1.1308 before rebounding 0.6% almost back to the flatline and then dropping again.
On the positive side, Draghi’s comments that he doesn’t see a recession coming for the eurozone area, just a sharp slowdown offered some solace to the otherwise negative press conference. The message that Draghi is not panicking yet was well received by a market. As a result, the market recovered from the initial sell off; a fairly tame reaction to news that the risks for the economic outlook have moved to the downside.
US Senate vote to end government shutdown?
Looking ahead investors will focus on the US senate vote which could bring an end to US government shutdown. The US senate will vote on democratic proposals, should they agree the US government will reopen after 34 days and counting of closure. However, tensions are still running high between Trump and House speaker Nancy Pelosi and whilst the dollar has picked up on hopes of the senate voting through the democrat proposals the reality is likely to be different. With nei5ther party holding a majority and Trump still unclear on what he is willing to accept, the shutdown could continue for sometime yet.
Oil higher on prospect of US sanctions on Venezuela
Oil prices were on the increase as the US threatened sanctions on Venezuelan exports amid the political crisis in Venezuela. With sanctions already on Iran, further sanctions on Venezuelan oil could quickly boost the price and significantly.
Whilst Venezuelan oil is heavy crude, which is not directly linked to Brexit or WTI, the sentiment factor will hit the latter two.
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