Daily Market Brief 9 March 2018

ECB’s Mixed Signals hit Euro

March 9th Highlights

  • Draghi dovish on inflation
  • Brexit transition agreement in doubt
  • Trade war possible as Trump confirms Tariffs

Euro breaks supports

The single currency fell yesterday as the ECB provided mixed signals on its intentions over future movements in monetary policy. With the U.S. seemingly committed to a weaker dollar, the conditions were in place for a rally through long-term resistance at 1.2520.

The Central Bank dropped wording from its press release about its commitment to raising the level of bond purchases were that to be deemed necessary. The euro rallied briefly when this was announced only to collapse close to medium term support as President Mario Draghi continued his dovish stance on inflation and expressed concerns over protectionism.

There had been a growing expectation from traders that Draghi was about to join the ranks of those who believe that the Eurozone economy is starting to become able to “stand on its own feet”. This had led to the market being “net long” short term going into the press conference which magnified the reaction.

Their disappointment translated into a violent move lower for the euro. It fell from a high of 1.2447 to a low of 1.2304 before consolidating at lower levels. There is support at 1.2260 but with the uncertainty surrounding today’s U.S. employment report the single currency is unlikely to rally far until the report has been released and digested.

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Sterling lower on Brexit transition concern

Despite the “eternal optimism” of the British Government and its seeming belief that a Brexit beneficial to the U.K. global aspirations can be achieved, the reality, it seems. Is somewhat different.

It is incredible that an action or set of actions that will affect every aspect of U.K. life for generations to come is being treated in such an atmosphere of short termism. For a senior minister to announce his optimism over a transition agreement being reached with a month on one day only for that claim to appear extremely optimistic the next is damaging to both the economy and the credibility of those involved.

Donald Tusk said that talks risk stalling if the UK doesn’t present a realistic solution for the question of the Irish border. With both sides position virtually immovable, stalemate looks likely.

The next summit of the European Council will take place on 22/23 March and as part of the Brexit timetable it was expected that the transition period and terms would be confirmed at this meeting. That now seems extremely unlikely and will be damaging for the pound should it not happen.

The pound fell versus a stronger dollar, making a low of 1.3781, rallied a little to close at 1.3815 then continued its fall overnight, so far (0630GMT) making a low of 1.3788.

A gentle trade war.

President Trump introduced tariffs of 25% on U.S. imports of aluminium and steel yesterday but fell short of any move on EU car imports that had been threatened earlier. He perhaps realized that it would be foolish to introduce such measures as the U.S. car manufacturers have little interest in, and even less expectation of, being able to sell their product in the EU.

Trump then exempted Mexico and Canada from the tariffs. This move had a double meaning. It meant that the talks over a renegotiation of the NAFTA agreement can continue and it confirmed that other countries will be able to apply for and receive an exemption. In reality, it is a “phony trade war”.

The reaction of the dollar has been positive with the greenback moving higher which may or may not have been the purpose of the announcement. The dollar index rallied to a high of 90.23 and remains shy of resistance at 90.50. The fall in the euro following the ECB meeting also contributed to the dollar’s rally.

Today’s release of the February employment report will determine the short-term direction of the greenback. The headline number remains notoriously difficult to predict but, in any case, analyst’s eyes will be drawn to the rate of increase in wages. That was the catalyst for volatility last month and the expectation is for that number to again be close to or possibly exceed 3%. This would drive expectation for four rate hikes from the Fed this year.

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.”