Daily Market Brief 15 June 2018

ECB Disappoints and Surprises Market

June 15th: Highlights

  • Extraordinary stimulus to be withdrawn by year end but no rate hike until mid-2019
  • Pound falls despite strong retail sales
  • Dollar gains on widening interest rate differential

ECB to end accommodation

In line with comments made earlier in the week by prominent members of the ECB Governing council, the Central Bank announced yesterday that it will end its Asset Purchase Scheme by the end of this year. However, Mario Draghi also announced at his press conference following the meeting that short term interest rates will remain on hold until at least next summer.

This is in response to “uncertainties in the Eurozone economy”, presumably a reference to the enormous debt overhang that still exists in the region and in reaction to data which seems to show an economy that is beginning to slow.

The single currency initially rallied on the news concerning the withdrawal of accommodation, reaching a high of 1.1853 but those gains were quickly reversed as the announcement came regarding interest rates. The euro fell to a low of 1.1562 and has barely moved overnight. It lost 1.9% of its value yesterday as it reached its lowest level since May 30th.

One of the main reasons for the fall was the realization that the gap between U.S. and Eurozone interest rates is set to widen further following Wednesday’s FOMC meeting.

It is difficult to say that the we have seen the low for the currency since there is still a raft of bad news that could see it move even lower, possibly to test the 1.1370 level last seen in May last year.

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Retail sales provide support, but Sterling ends lower

Following two months of poor retail sales numbers due in no small part to the unseasonably bad weather seen in March/April, it was always likely that the May data would show a radical improvement.

Such an improvement was seen yesterday as year on year retail sales grew by 4.4% in May. This was well above analyst’s prediction of 2.5% and three times higher than April’s number which was reduced from 1.5% to 1.4%.

In the past, the consumer has often come to the rescue of both the economy and the currency, but yesterday’s data failed to give a lift to a pound that is suffering from Brexit woes.

Sterling traded in a wide range between 1.3447 and 1.3256 closing near the low at 1.3263. The news of interest rate hikes continuing in the U.S., has hit Sterling as well as the euro although the pound did manage to rally against the single currency making a high of 1.1465 and closing just one pip lower.

Having seen several significant data releases this week, the markets attention will turn again towards Brexit next week as the political fallout continues. The Government still hasn’t managed to produce its proposals for the future relationship and is becoming bogged down in the quagmire of procedural issues in Parliament.

Dollar ending the week on a positive footing

Sentiment in the FX markets can “turn on a dime” as influences shift and change with several factors all contributing to the strength or otherwise of a currency.

This week the dollar has undoubtedly been the star performer. Starting the week with a positive jolt from the Trump/Kim Summit which provided a boost to global risk appetite simply by taking place, irrespective of the longer-term political fallout.

We got to know the meaning of a hawkish hike on Wednesday when the FOMC first, as expected, hiked rates,, then informed the market that there would be two more hikes this year as monetary policy returns to normal.

Next week has a very light data schedule so the dollar is likely to remain firm although just how much selling of the euro remains will play a major role in the level of the dollar index. Yesterday, the index reached 94.94, its highest level since last November.

Attention could switch to trade as there is expectation of a decision form President Trump on the implementation of tariffs on several imports from China.

While the President prefers to remain focussed on “making America great again” by what he sees as foreign policy wins, it is domestically that the dollar is receiving most of its support.

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.”