ECB Temporarily Steals the Spotlight

ECB could push back rate hike expectations

Markets are trading relatively mixed ahead of the open on Wall Street on Thursday, with much of the focus falling on Europe where Theresa May lives on and the ECB meet.

The ECB should be an interesting affair despite slipping under the radar due to the political soap opera that is Brexit. Domestic political issues are another distraction for investors, with Italy offering some concessions on the deficit while at the same time keeping it above 2% and Macron coming under significant pressure in the aftermath of the riots. Coming against the backdrop of slower regional growth in 2018 and less optimistic views on the global outlook for next year, the job of the ECB has just got harder.

None of this is likely to change its plans to end the quantitative easing program this month but with the new economic projections likely to be lower than before, rate hike expectations for next year may be pushed back to the end of the year or beyond. The growing headwinds combined with financial market turbulence does not create the ideal environment for embarking on a new tightening cycle and I think policy makers may take a conservative approach to it.

May hoping for help from EU after week to forget

It’s been a week to forget for Theresa May, with the UK Prime Minister having to cancel the vote on her Brexit deal in the face of a humiliating defeat, before heading to Brussels to seek the help of her European partners before facing a vote of no confidence at home. Somehow, after all of that, May lived to tell the tale but the heat doesn’t end there. Today she heads back to Brussels again for the EU summit, during which she’ll try (again) to convince her colleagues to provide additional assurances on the backstop in order to get the deal through parliament.

Tusk has been open to discussing “how to facilitate UK ratification” but like his peers is insistent that no elements of the deal – including the backstop – are up for renegotiation. I’m not quite sure what May can secure that will provide comfort for the many MPs that aren’t satisfied with commitments to best endeavours when faced with the prospect of an indefinite backstop. It’s just another day for Mrs May, who’s become quite used to near-impossible puzzles over the last 18 months. The pound remains surprisingly resilient though, sitting just below 1.27 but nice off the lows just below 1.25 on Wednesday.

Gold still bullish but held back by flat dollar

Gold is a little flat today, with an equally flat dollar providing little direction for the yellow metal. We’ve seen plenty of intraday volatility in the currency space recently – particularly sterling pairs obviously – but the dollar hasn’t really moved one way or another. I remain a dollar bear going into next year which should be good for gold but at the moment it’s really dragging its feet. Gold is holding above $1,240 which is a bullish sign, with $1,260 and $1,280 both now looking feasible but until the dollar takes a dip, it may be a very gradual move.