ECB to stay on hold amid talk of EU-US trade deal
The euro bounced off lows of not far off $1.17 against the dollar late yesterday after the FT reported that the EU is closing in on a trade deal with the US which would see it ‘accept’ a 15% tariff. It is trading at around $1.1770 this morning, and at about £0.8675 against sterling (largely unchanged from yesterday morning), ahead of the ECB’s latest interest rate announcement this afternoon. The pound has also gained ground against the US currency, trading at about $1.3565. The ECB is widely expected to keep the deposit rate unchanged at 2%, having cut at each of its previous meetings this year, and is likely to keep its options open regarding any further reduction as it awaits some clarity on the EU’s trade negotiations with the US. Regarding the euro’s exchange rate, while it is off its early July highs, it is running ahead of the levels assumed by the ECB in its June growth and inflation projections, so Christine Lagarde is likely to face some questions on the currency at today’s post-meeting press conference.
US equities rallied into the New York close on the back of the report of a possible US-EU trade deal, building on earlier gains following the announcement of a deal between the US and Japan, with the S&P ending about 0.8% higher on the day. European stocks, which had underperformed over the past few sessions, added more than 1% yesterday and they are up another 1% or so at the open this morning. In government bond markets, US, German and UK yields all ended higher yesterday (by around 4-6bps in the 10-year area), partly in response to the news on the trade front, and they are nudging higher again this morning.
The FT reported that the US and EU are ‘closing in on a trade deal’ that would include a 15% tariff imposed by the US on European imports, citing three people familiar with the situation, with exemptions for “some products such as aircraft, spirits and medical devices”. According to the report, the 15% would include the 10% universal rate set by Trump and “preexisting tariffs” in place before Trump took office, and would apply to cars, a decrease from the current 27.5%.
For the day ahead, as well as the ECB meeting, economic data due include flash PMIs for July in the main economies (Euro area, UK and US), and new homes sales and weekly jobless claims in the US.