ECB Meets, Euro Risks
Today the European Central Bank and the Bank of England hold their monthly policy meetings. Neither central bank is set to make any changes. But both may still consider further easing under a new governor from July in the BoE’s case or if Eurozone sentiment worsens again over the summer in the ECB’s case. For now the euro remains sidelined, trading in a 1.28-1.32 range against the dollar. There are two factors currently supporting the single currency. First, as Chart 1 shows Eurozone data has begun to pick up again. This is reducing the pressure on the ECB to follow up on last month’s 25bps cut in its refinance rate. German manufacturing PMI rose from 46.7 in April to 48.3 in May. In addition, Polish PMI – which has been a good leading indicator of shifts in Germany – also rose from 46.9 in April to 48.0 in May. As a result the ECB is set to keep its deposit rate at zero and its refinance rate at 0.50% today. Second, the euro is also being supported by the Eurozone running the largest current account surplus amongst the world’s advanced economies.
Read the full report: UBS