ECB expected cut Deposit Rate further into negative territory

Market Analysis by Junaid Wilson


Yesterday, was dominated by US dollar strength the GBP/USD broke the 1.5000 level and is currently trading at 1.49500.

Yesterday main events started with the UK construction PMI. At 55.3 the sector PMI was down more than 3 points from its unrevised October reading and at its lowest level in seven months. That said, the latest print was still well into solid growth territory and firms remain highly optimistic about the the business outlook.

Slower growth of new business was largely responsible for the headline decline and this in turn contributed to a much smaller increase in employment than the 11-month high recorded at the start of the quarter. Input buying also expanded more modestly although vendor performance continued to deteriorate amidst further reports of stock shortages and pressure on capacity.

Sub-contractor usage still rose at a solid rate but the increase in their average charges was the smallest in almost two years. Indeed, overall input cost inflation moderated and was well below its long-run average.

The November results point to an overdue deceleration in activity rates in the construction industry. However, the overall picture remains positive enough and if costs pressures are beginning to ease slightly, the BoE will certainly not be unhappy.

Later in the day we had the ADP employment report. ADP is calling for strength in Friday’s employment report, at a higher-than-expected gain of 217,000 for government payrolls in November. Month-to-month, this report is not always an accurate indicator for the government’s data, forecasting a much lower reading than what turned out for October and a much higher reading than what turned out for September. But ADP’s trend has been accurate, that is steady payroll growth near 200,000 — and today’s report points to strength that would be slightly above trend.

After the realise we had prolonged dollar strength throughout the afternoon. With NZD and AUS giving up some of the gains it made early in the week.

Today we have the highly anticipated EU monetary policy decision at midday GMT.


ECB expected cut Deposit Rate further into negative territory, maintain other rates

– Cut Deposit Rate by 10bps to -0.30%
– Maintain Main Refinancing Rate at 0.05%
– Maintains Marginal Lending Rates at 0.30%

If the decision will be to cut main refinancing rate and extend their 60 billion a month bond buying program then we could expect another leg lower in the EUR downtrend targeting 1.00 by the end of the year.

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