Euro not out of the woods yet

The euro was the big loser last week shedding around 2 cents against the dollar from the previous Friday to close at around $1.16,  with all of this decline coming after Thursday’s ECB meeting. It is slipping again at the start of play today and a re-test of last week’s low of around $1.1540 cannot be ruled out.  The single currency also weakened against sterling over the latter part of last week, although its losses were comparatively small, and is kicking of this morning trading at just under 87.5p

The ECB set out its monetary policy stall clearly last week. If the forthcoming economic data remains consistent with its outlook for inflation, the ECB will reduce the monthly pace of its asset purchases (QE) to €15billion in October (from €30bn currently) and end the purchases altogether in December this year. At the same time, it expects  interest rates to remain at their present levels at least through the summer of 2019, which means any increase in rates unlikely before September next year

The Fed raised interest rates by 25bps at last week’s meeting and is likely to have raised them a few more times before the ECB embarks on any rate-hiking cycle – it signalled 2 further 25bps hikes could be on the cards over the remainder of this year with 3 more possible in 2019

The Bank of England is next up this Thursday. It is likely to keep interest rates unchanged at 0.5% but, with high frequency data (e.g. PMIs and retail sales) pointing to a pick up in activity in the second quarter, is likely to reiterate that a gradual albeit limited increase in rates is still on the cards. Meanwhile, the UK government faces further votes on amendments to its EU Withdrawal Bill this week

Data due this week include Euro area flash PMIs on Friday and jobless claims in the US on Thursday