Daily Market Brief 7 September 2017

Traders Await ECB Guidance

September 7th: Highlights

  • Doubts over Draghi comments on Euro Strength
  • Parliamentary vote on Brexit to determine Sterling direction
  • Pound slowly correcting but no fresh buying

ECB meeting to determine short-term Euro Direction

Mario Draghi, the ECB President is the first Central Banker in the firing line following the “summer lull”. Over the past few weeks speculation has been growing that the ECB will start on the tapering of its Asset Purchase Scheme put in place to provide liquidity during the debt crisis which enveloped the region.

Whilst economic growth has returned and stability is proving continued support to be unnecessary, the effect of its withdrawal is an unknown which the ECB prefers to face from a position of strength.

The Euro remains at close to two-year highs although it has lost a little momentum. A tightening of policy could provide the impetus for it to restart its journey towards parity versus Sterling and the 1.2500 area against the dollar.

Draghi has been very careful to be dovish on monetary policy to avoid mention of currency strength. He has preferred to err on the side of caution until there is certainty that the recovery is self-sustaining, and saying little about the currency, viewing strength as a by-product of the market’s view of the economy.

Should Draghi’s performance disappoint traders, support between 1.1780 and 1.1820 versus the dollar could be tested although any correction versus Sterling will be shallow given the issues facing the U.K. economy.

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Brexit debate begins

To quote Winston Churchill, “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning. The first of many Brexit debates begins today in Parliament as the Government presents the bill which enshrines EU law into the U.K. statute books allowing them to be revisited later.

The opposition Labour Party has already confirmed that its members will vote against the Bill calling it a power grab. The Government is accused of trying to obtain a blanket authority to deal with EU laws without further reference. Labour is concerned that its traditional values such as workers’ rights will be diluted.

The pound has seen a recovery, however slight, this week as traders pare back short positions prepared to believe that there is little new unwelcome news about Brexit to be revealed.

David Davis, the Brexit Minister, has already faced derision over his assertion that substantial progress has been made and should members of his own party start to waver in their support, the consequences could be fatal for both the Government and the Prime Minister each of whom are hanging on by their fingertips.

Monetary Policy starting to diverge

Market concentration on three major economies, the U.S., Eurozone and U.K. highlights the divergence that is starting to be seen as each recovers from the financial crisis but also reacts to their own drivers.

The surprise revision of U.S. Q2 GDP bodes well for a continuation of a tightening of monetary policy. The only question is whether a further rate hike will take place this year or early next.

Concerns over the effect of currency strength have subdued the Euro over the past few days as few new factors have emerged and a correction has begun.

The U.K. is beset by a renewed economic slowdown purely due to lack of business investment on the back of Brexit uncertainty.

There is one common theme facing the Central Banks of these countries/region. That is quantitative easing. When will be the right time to start the withdrawal of stimulus?

Other nations, in particular, the “dollar bloc” of Canada, Australia and New Zealand are also diverging. Canada hiked rates again yesterday, the second in consecutive months, reacting to far stronger than expected Q2 GDP data. Australia and New Zealand are still subject to inconsistent economic numbers. Australia left rates on hold earlier in the week perhaps having advance knowledge of weak trade and retail sales data.

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.”