Big Stories from ECB, UK and USA - falling returns abound

EUR: On Thursday, the ECB took the extraordinary step of increasing monetary easing across the Eurozone – although widely expected, this step takes EUR rates well into negative territory and continues a policy that has failed for many years.

The FT this weekend highlighted some of the reactions

• Jens Weidmann, President of Germany’s Bundesbank said M Draghi had “overstepped the mark”, and promised to ensure there was no unnecessary delay in raising rates again.

• Newspaper Bild said “the horror for German savers is continuing”, and displayed an image of President Draghi, naming him Count Dracula.

• Klaus Knot of the Dutch Central Bank said that the package of measures is “disproportionate to the current economic situation”.

The main issues are: Will negative rates promote inflation? Has the ECB run out of ammunition, and will savers now be charged for holding EUR cash on deposit? If savers are charged for holding cash, in a wage-stagnant environment – where will consumers find a return on investment?

Big questions, all of which weigh on the EUR.

USD: Also in a state of flux. The Fed is expected to cut rates this week (the 2nd cut in 11years) to boost an economy going through a ‘rough-patch’. EUR/USD remains stuck in a range 1.0950 – 1.1250, but very volatile within that range.

The Fed is balancing trade worries (which seem to be easing), alongside rising inflation (Core consumer inflation at the highest point of 2019) and a downturn in global activity. 

Fridays boost to EUR/USD (up through 1.1125) was short-lived as the USD strengthened due to the Saudi Arabia attacks this weekend. We start the week around 1.1075 with the Fed decision ahead.

GBP: regained all of the recent lost ground, as the threat of a No-Deal faded. GBP/EUR has risen from 1.0800 to above 1.1200 again, and GBP/USD from 1.2000 to 1.2450 reached 1.2500 on Friday. Importantly the DUP seems to be moving what the FT calls “some of it’s red lines” and support a Brexit deal that “created a regulatory border between N Ireland and mainland Britain”. 

There can, however, be no hiding the abysmal data that the UK has produced recently, and the prospect of further periods of uncertainty will not help investment decisions.