European Central Bank changes cause volatility

Today's Highlights

• European Central Bank changes cause volatility

• UK trade data boosts GBP

• Sterling awaits Supreme Court ruling

Current Market Overview

The European Central Bank surprised the market yesterday by extending their asset purchase programme by nine months rather than the six expected months; which was longer than investors anticipated. The amount of bonds bought per month between April and December were reduced to 60 Billion Euros instead of 80 Billion Euros. At first glance, the market took this as a tapering manoeuvre; causing the Euro to strengthen aggressively. However, after plugging the sums into their calculators, traders quickly realised that €60 Billion over nine months is greater than €80 Billion over six months and the Euro reversed any gains, ending the day on the back foot.
 
The markets were expecting a more hawkish rhetoric from ECB President, Mario Draghi, due to the optimism he had expressed earlier in the month, but in this conference he took a more cautious approach; talking about the possibility of more stimulus and even hinting that there is no tapering in sight. It was clear that the ECB President was not looking to make the same mistake he made in previous meetings, where he had underwhelmed the market. Some analyst had expected Draghi to take his foot off the gas with the stimulus, but he was in no mood for that, as a stronger Euro could jeopardise their fragile recovery.
 
The USD benefited from flows out of the Euro to the USD, helped by a sharp divergence in bond yields.  The continuation of USD strength will be determined by the Federal Reserve interest rate meeting next week. The market has priced in almost a 100% chance of a 25 basis point rate hike, but it is the Federal Reserve’s guidance on rate hikes in 2017 that will give the USD its direction. Analysts are currently expecting a single December interest rate hike, followed by a long pause until June. 
 
Sterling has continued to trade within a narrow trading band as we await the decision from the Supreme Court Ruling on the UK Parliament’s involvement in the decision to trigger Article 50. Parliament has already backed Theresa May’s motion to start Brexit proceedings by March next year. In return, the UK Prime Minister has agreed to offer more details of the Brexit strategy.  Having a definitive date could cause large fluctuations in the value of the GBP as traders analyse a hard or soft Brexit headlines and repercussions. 
 
This morning started with very encouraging UK trade data for October but a mess as far as previous months were concerned. The Office for National Statistics was forced to admit an embarrassing miscalculation for the period from January 2015 to September 2016 due to the data it has on gold.  Awks. There will be a Bank of England rate setting meeting next week and, whilst no one is expecting any interest rate movement, the nature and tone of the communication that comes from that meeting will be eagerly awaited.
 
That’s about your lot for this week. I hope it has been a good one for you. Donald Trump is still getting a lot of bad press but he is apparently helping the people of Guatemala, where people have set fire to cardboard versions the US President-elect wearing devil horns. This is part of a traditional ceremony, "La Quema del Diablo", or the Burning of the Devil, held ahead of Christmas every year. I don’t need to add any words at this point. Have a great weekend.