Daily Market Brief 8 September 2017

Dovish ECB Sends Euro Higher

September 8th: Highlights

  • Strong Euro creates Catch 22 for ECB
  • Parliamentary Brexit brings nothing new
  • Dollar suffering from multitude of headwinds

ECB meeting provides more questions than answers

Yesterday’s much anticipated ECB policy meeting was supposed to provide clarity to traders over the timing of the Central Bank’s withdrawal of stimulus. Traders had convinced themselves that the long-awaited correction for the common currency would begin following Sr. Draghi’s press conference. The expectation was driven by the age-old ploy of “sources close to” having some insight.

Draghi was supposed to be concerned about the strength of the common currency and be about to voice those concerns to the world. Instead he lowered the target for inflation due to the continued strength of the Euro and maintained the growth target.

The Euro immediately reacted to the knowledge that although the strength of the Euro had been acknowledged there were no plans to rein it in.

The strength of the Euro creates a catch 22 situation for the ECB. Growth is on track and inflation is benign. Were a tapering of the Asset Purchase Scheme to take place, the currency would rise due to the tightening of monetary policy. Yet, acknowledging the strength of the currency but taking no action also sends it higher.

The Euro gained most against the dollar reaching 1.2090. Against the pound, it reached 0.9200, about 0.4% stronger on the week.

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Parliamentary debate brings nothing new

The momentum of the pound’s fall appears to be slowing. Traders are maintaining short positions but a lack of new factors, compounded by the continual regurgitating of well-known factors is leading to narrower ranges against the Euro.

Yesterday, the ECB press conference and the Parliamentary debate over the conversion of EU laws onto the U.K. statute book failed to galvanize any major selling. The pound’s trade weighted performance was virtually unchanged as it made strides against a dollar which is being buffeted by several factors.

The debate in Parliament must have made disappointing viewing for the EU negotiating team as the same old arguments were trotted out by the Brexit minister and his opposition counterpart. The fact that Brexit has been turned into a party-political issue can only lead to further delays and lack of clarity. For the Government to be cast as the leave party despite many of their MP’s voting remain is a recipe for impasse. The opposition on the other hand is being cast as the remain party despite a substantial proportion of their supporters voting leave.

The discussion over the Brexit bill rumbles on with both sides claiming to have the legal argument on their side. Since there appears to be no “higher power” to which they can appeal and obtain a definitive answer, there are still months of negotiation to follow.

Dollar buffeted by several headwinds

The dollar is in a comparable situation to the pound in that there is a perfect storm of negativity building which is driving it lower.

Sluggish inflation highlighted earlier in the week by permanent FOMC member Lael Brainard could lead to a delay in any further rate hike. The President has fallen very quiet in his promise of fiscal reform and economic stimulus plans preferring to “press the flesh” in hurricane torn Texas. Finally, any further escalation of possible conflict in the Korean Peninsula will lead to a flight to safety which favours the JPY, CHF and latterly the Euro.

The dollar index fell yesterday to a low of 91.01, its lowest level since January 2015.

Last week’s employment report was unquestionably weak and traders seem to be exhibiting a delayed reaction to its likely effect on inflation. The euphoria of two reports above 200k new jobs has now dissipated following the 10%+ revision lower of the July data and an August figure of just 156k.

Given that the report was released, unusually, on the first day of the month and is in any event subject to large revisions, there is a possibility of a correction when the September report is released on October 6th, but until then employment is providing no support for the dollar.

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.”