The euro strengthened against USD last night as the Federal Reserve meeting weighed on the dollar. The European Central Bank meeting will be in the spotlight today, with the rate decision being released at 13:45 CET and followed by a press conference at 14:30 CET. Pressure on the ECB to take action may be more pronounced than at the last meeting, not only because of the series of discouraging data released from the eurozone, and the worsened fiscal and economic outlooks, but also because of diverging economic and financial conditions for different eurozone countries. During the previous press conference, comments from ECB President Christine Lagarde came as a shock to markets when she stated that the central bank was “not here to close spreads” between the borrowing costs of member states. She was forced to walk back this sentiment with an apology, while the ECB went into damage control mode with asset purchases. This time there is reason to believe the ECB will focus on easing pressures on these spreads in debt markets while focussing on improving credit conditions. Last week, the ECB grandfathered the eligibility for collateral instruments such that securities that were eligible to be collateral prior to the crisis remain eligible. The decision to ease collateral rules may set the tone for the implementation of additional measures the central bank could take to limit an undesirable widening of spreads between, for example, German and Italian sovereign debt, which could threaten the transmission channels of monetary policy to the real economy. A likely approach to address this would be to expand the pandemic QE programme (PEPP) of €750bn by, for example, another €250-500bn for coronavirus-related loans. Additionally, the ECB may support credit conditions via the TLTRO program to support lending, particularly to small and medium enterprises. This morning’s data releases included German retail sales that plunged by 5.6% MoM in March compared to the consensus for a 8.0% fall, while YoY numbers dropped to -2.8% from a revised +6.5% in February. French GDP for Q1 fell with nearly 6% QoQ and 5.4% YoY, while CPI data from France and Spain surprised to the upside. The figures are first estimates however that rely mainly on lagged data and do not reveal much about the French and Spanish economy during the period of lockdown. Additionally, these data are revised substantially even in normal times, so final revisions are key in estimating the actual damage.

The general trend of dollar weakness has remained intact over the past 24 hours, notwithstanding some patchy performance from JPY and GBP. Yesterday was an interesting day for US headlines, as Q1 GDP contracted by an annualised 4.8%, the worst decline since 2008. The Bureau of Economic Analysis deigned to state the obvious and attribute the decline to lockdown measures implemented in March. As an advance reading, yesterday’s print is likely to be downgraded even further as more data is included in the estimate. The second quarter is likely to see an even larger contraction, due to being mostly or entirely spent in lockdown amid rising unemployment. The Federal Open Market Committee gave a downbeat assessment of the medium term prospects of the economy while holding rates unchanged. The FOMC statement referred to “considerable risks...over the medium term”, and Chair Jerome Powell further laboured this point in the press conference, at one point describing the economic cost as “heartbreaking”. Powell went on to call for further fiscal stimulus, noting that the US had considerable leeway to use debt to support growth. In terms of short term policy, Powell said he felt it was in “the right place”, while the usual assurances about being ready to act further if needed were also offered. The US data calendar is busy today, with weekly initial jobless claims expected to fall to around 3-4 million upon release today at 14:30 CET. Personal spending and income data will be released at this time, along with the personal consumption expenditures price index. Later in the afternoon the Chicago purchasing managers’ index will be released.

Sterling has somewhat lagged the rest of the G10 in rallying against the US dollar over the past couple of days, and as a result has found itself marginally lower against the euro compared to yesterday morning. News flow has been thin, and largely beside the point for the pound. The Bank of England announced its intention to buy 10 billion pounds of corporate bonds, taking its ownership up to about 15% of the eligible market. The measure is aimed at easing credit conditions, and is consistent with other credit easing measures taken by the Federal Reserve and European Central Bank. The Government’s strategy for re-opening the economy will be in focus over the coming days, as Downing Street is expected to publish a blueprint doing so. No UK data will be released today.