Daily Market Brief 7 June 2018

ECB to signal end to QE; Euro Gains

June 7th: Highlights

  • Heads of German and Dutch CB’s see end to bond purchases
  • Sterling remains under Brexit Shadow
  • G7 and FOMC to provide direction for Dollar

ECB Economist confirms QE to be debated

Peter Praet, the ECB Chief Economist and an ally of ECB President Mario Draghi confirmed yesterday that the tapering of the ECB’s two trillion euro plus Asset Purchase Scheme will be debated at next week’s policy meeting.

The Presidents of both the German and Dutch Central Banks also confirmed that the timing of such a discussion is right and that the Asset purchase Scheme should be wound down by year-end.

Even though such a discussion will take place there should still be caution over the Italian Government’s policies, the debt overhang and the slowdown in the Eurozone economy. It is probable that until some sign comes from Sr. Draghi that he is in favour of the tapering that the single currency’s rally will be subdued.

Dutch CB President Klaas Knot said that he saw no reason for the programme to continue while Bundesbank President Jens Weidmann said expectations of an end to QE by years end were “plausible”, an uncharacteristically low-key response from such and devout inflation fighter!

The single currency rallied close to the resistance at 1.1820, reaching a high of 1.1796. It closed at 1.1774 and has remained firm overnight. It has now gained close to 1.25% this week and many traders are now calling the low of 1.1510 seen on May 29th a medium-term bottom.

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Sterling muted as Brexit blueprint to be discussed

It is impossible to talk about the short-term prospects for Sterling without Brexit looming large.

There are several drivers for the pound, all of which are negative but even the faint prospect of a soft Brexit sees it, if not rally, then certainly hold its own. The interest rate outlook for the UK remains in doubt as Silvana Tenreyro, the newest member of the MPC, said this week that she believed that “much of the UK’s economic weakness was temporary, but the timing of rate hikes remains an “open question””.

Should the ECB confirm the withdrawal of accommodation at their forthcoming meeting that will most likely add to the pressure on Sterling as the UK is not going to be able to withdraw its own bond purchase scheme of raise rates this year.

The pound is in a state of flux with traders already having short positions but not looking to either add to them or start to wind them down. It remained in a fifty-pip range yesterday making a high of 1.3444 and closing at 1.3414.

Speculation remains that even if there is a soft Brexit, that Prime Minister Theresa May is unlikely to survive, something that is considered by analysts to be bad for the currency, not due to the people involved, but merely due to the political upheaval and uncertainty it would cause.

Fed to hike next week

It now looks certain that the Federal Reserve will hike rates at next week’s FOMC meeting. It will be the second hike this year and will be the prelude to two more provided the U.S. economy continues to perform as it has so far this year and inflation continues to rise, however slowly.

With the ECB expected to discuss the end of its QE programme, the interest rate advantage held by the dollar is probably going to start to be eroded in Q1’19 which provides further credence to calls of a medium-term bottom for the Euro.

Given the single currency represents more than 50% of the basket of currencies that make up the dollar index, it is close to a medium term high. The pound makes up just short of 12% of the index so even if the pound collapses under the weight of a hard Brexit, the effect on the index will be muted.

This weekend’s G7 meeting hosted by Canadian President Trudeau will be an interesting affair as President Trump tries to defend his stance on trade facing six certain doubters.

As the economies of the G7 nations start to grow and diverge given the different pace of recovery, trade is going to play an ever-increasing role and it could be said that Trump has “got his retaliation in first”. He has fulfilled his election pledge to reverse several of the deals entered into by his predecessor, who was perhaps more realistic about America’s global status.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”