Daily Market Brief 14 June 2018

Euro awaits ECB meeting

June 14th: Highlights

  • Merkel continues trade disagreement
  • Sterling unchanged as Inflation remains at 2.4%
  • FOMC in hawkish hike

Single currency facing increased volatility

FX traders, starved of any meaning behind the drivers for the single currency for some time, have pinned an inordinate amount of emphasis on today’s policy meeting of the European Central Bank.

Sentiment has a considerable influence on FX rates and the outcome of today’s meeting will drive sentiment, the only issue is in which direction. If Mario Draghi, in his press conference, fails to mention the tapering of the Asset Purchase Scheme, the single currency is likely to fall. However, if he says that the reduction, with an eventual withdrawal, is under consideration, the euro should to rally through resistance at 1.1820 and a medium-term low put in place.

With the heads of the German and Dutch Central Banks and the ECB’s own chief economist all commenting recently that the withdrawal of accommodation will be discussed, the market has been a little reticent, having been burned by Sr. Draghi’s dovishness before.

The euro traded in a 1.1745/1.1802 range yesterday closing close to the high at 1.1791. Overnight it has remained firm.

Angela Merkel fanned the flames of the trade dispute with the U.S. yesterday accusing President Trump of focussing on the trade in goods and adding that when goods and services together are combined, American is running a surplus and the stronger dollar is therefore warranted. There has been no reaction as yet from the White House.

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Sterling unmoved by unchanged inflation data

The rate of inflation in the UK remained unchanged in May at 2.4% despite analysts’ predictions of a small increase. The recent fall in Sterling hasn’t, as yet, followed through but summertime is the period when inflation falls as fuel prices have less effect and food prices tend to be lower.

Sterling remains under pressure despite Prime Minister Theresa May managing to see off a potential rebellion from MP’s over the Brexit Bill currently being discussed in Parliament.

No matter what happens in the House of Commons, Mrs May remains under pressure to deliver a workable set of proposals to Brussels preferably before the EU summit at the end of the month although this now seems increasingly unlikely. That Parliament is still discussing procedural matters at what is now clearly the ”eleventh-hour” is as incredible in itself as will be the ability of the Government to produce a template for the future relationship that Brussels accepts.

The pound has been in negative territory since it saw brief rally following the Parliamentary vote on Tuesday although it has stayed remained quite volatile. Yesterday, it traded in a 1.3390/1.3308 range, closing virtually unchanged on the day at 1.3375.

FOMC hikes and will continue to do so

When the MPC hiked rates last November, it was considered to be a “dovish hike” as in his subsequent press conference the Governor said it would be the last hike for some time. I wondered at the time what a hawkish hike would look like and yesterday I received my answer.

The FOMC, as expected, raised short-term interest rates and in his own press conference, Chairman Jerome Powell signalled that there will be two more hikes in 2018. The dollars’ reaction was surprisingly muted as external issues continue to have the most influence.

The dollar index moved up to 94.03 but closed lower on the day as trade issues continue to dominate. It closed at 93.57 and has remained under pressure overnight.

President Trump will chair a meeting later today in which the decision will be made whether to activate the tariffs, he has approved, on billions of dollars’ worth of U.S. imports from China.

Any action on tariffs is sure to bring a stinging response from Beijing although they will still be feeling well disposed following the success of what was clearly their initiative over the Kim/Trump Summit.

There has been mixed reactions at home for the President over meeting with the seeming abandonment of some of his allies particularly over the cancellation of military exercises with the South, which is being seen as another triumph for Beijing.

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.”