Daily Market Brief 10 May 2017

Euro Correction Continues

May 10th: Highlights

  • Single currency fails to hold 1.0900
  • Draghi to turn Hawkish?
  • Trump fires FBI Head

Sterling gains on Euro

The euro has entered a corrective phase following as short-lived relief rally following the French election result.

Emmanuel Macron is now setting about the task of building a cohesive Cabinet from his fledgling party. The concern in France now is whether M. Macron can translate his charismatic victory into the strong and committed leadership France needs. A dedicated European, the new President will need to concentrate on domestic issues despite his clear views on Brexit and other issues of E.U. reform.

The euro broke through support at 1.0920 and 1.0900 to reach a low of 1.0863 before recovering a little.

Sterling continues to gain support from the likelihood of a landslide victory for the ruling Conservative party at next month’s General Election. The pound broke through the 0.8420 support level before bouncing off 0.8400. With Brexit the major topic facing both currencies in the coming months, there will be volatility within relatively narrow ranges as both sides vie for the upper hand.

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U.K. Inflation in the spotlight

A well-respected research body, The National Institute of Economic and Social Research, has lowered its forecast for the peak in inflation in the U.K. This follows the bounce in the pound in the past few months.

They had previously published a far higher prediction than both the market and the Bank of England.

The NIESR has cut its reduced its forecast high from 3.7% to 3.4%. This is still well above BoE Governor Carney’s forecast of 2.7%. A poll of economists commissioned by Reuters sees a peak for inflation this Autumn of 3% before the rate starts to fall back towards the Government’s target of 2%.

Several banks called Theresa May’s calling of a General Election a “game changer”. It will be interesting to see how the BoE views the rise in Sterling in its Quarterly Inflation Report which is released tomorrow.

Draghi to turn hawkish?

A speech today by ECB President, Mario Draghi, to the Dutch Parliament has been well publicized and choreographed. It is therefore likely that he will be talking about more than his love of gardening.

Commentators are expecting a change in emphasis if not direction. Following on from his colleague Yves Mercsch’s comments that the ECB had likely moved from a negative to a neutral bias for the Eurozone economy, Draghi could give some guidance on the removal of extraordinary support.

The single currency should receive some support from this change in emphasis but the marker will await tangible evidence before this can also be labelled a “game-changer”.

Trump fires FBI Chief

In a move that is being labelled as politically motivated, President Trump has unceremoniously fired the Head of the FBI. James Comey was at the top of two investigations; the Clinton email saga and Russian involvement in the recent election.

Analysts are surprised that Comey has been fired ostensibly over his handling of the Clinton emails investigation. Trump once praised the FBI director’s handling of the matter. There is a suspicion that Trump wants a speedy conclusion to investigation of his links to Moscow.

The dollar slipped into “risk aversion mode” falling against the JPY.

Pyongyang’s new Ambassador to London has stated that North Korea is ready to stage another nuclear test, its sixth. The new south Korean President, Moon Jae-In is a more conciliatory leader than his predecessor promising aid to and dialogue with their “neighbours to the north”.

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.”