Global equities went through the roof yesterday amid hints from Mario Draghi that the ECB was ready to launch another round of stimulus should inflation fails to accelerate. The Euro Stoxx 50 jumped as much as 2.60% to 3,458 points, the highest level since early May, while US equities were also better bid with the S&P 500 hitting 2,930 points, up 1.40% on the session as investors speculate that the Federal Reserve would follow on the ECB’s footsteps.
Over the last few months, Donald Trump has put significant pressure on Fed Chair Jerome Powell as he blamed him for derailing the US economy by unnecessarily tightening monetary conditions. Interestingly enough, the trade war against China, which was triggered by President Trump, worsened the situation as it accelerated the global economic slowdown and forced the Fed to pause its quantitative tightening as well as further rate cut. Now, it looks like Trump would get those rate cuts in the end.
The single currency fell across the board with EUR/USD falling 0.40% to below 1.1181 but stabilised around 1.12. The limited downside size move in EUR/USD suggests that market participants anticipates the Fed would also turn more dovish than at its May meeting.
However, according to Reuters, it looks like Mario Draghi’s colleagues did not expected such a dovish speech and said that the possibility of a rate cut or the extension of quantitative asset purchases have been mentioned but that there was no consensus. Therefore, we anticipate that Powell would introduce a dovish twist but nothing significant. Indeed, the current economic conditions do not justify going in full easing mode, especially as it would spread panics among investors.
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