Daily Market Brief 23 May 2017

Merkel Sees euro as “Too Weak”

May 23rd: Highlights

  • Chancellor blames ECB Policy
  • “Russiagate” continues to weaken dollar
  • Fall in Conservative support weakens Sterling

German Trade Surplus a factor of weak Euro

German Chancellor Angela Merkel made her first comment for some time concerning the Eurozone economy yesterday. She said that the record German trade surplus was due to a weak Euro. She “blamed” ECB monetary policy which had created an artificially weak currency.

Her comments provided fresh momentum to the single currency which was beginning to run out of stream following its rally against the dollar and pound. The ECB remains cautious over the sustainability of Eurozone economic growth. It retains a “negative” or “easing” bias regarding the economy but rising growth over the past two quarters have led to calls for a less conservative approach.

Inflation is rising. The last release was 1.9% in April up from 1.6% in March. Pressure for a change in monetary policy will continue to grow but S. Draghi is very aware of his mandate to concern himself with the Eurozone as a whole.

The Euro reached a high of 1.1255 overnight, a level not seen since last September. It is clearly benefitting from several positive factors. The current weakness of the dollar is a major short term factor despite there being no end in sight to Trump’s “Russiagate” crisis.

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Sterling lower as Conservative lead cut

The latest opinion poll released in the U.K. shows the ruling Conservative Party’s lead being cut to 9%. It is likely that this and no fresh impetus to drive new buying led to weak long positions being liquidated. The pound fell to a low of 1.2965 against the dollar and continues to be weak against the surging Euro. The single currency is now well supported on dips towards 0.8620 and has made a high overnight of 0.8668.

The (presumed) terrorist attack last night in Manchester has had a negative effect on sentiment but this is a long way down the Government’s list of priorities as it deals with the aftermath.

The pound has risen by 4% since the General Election was called so some correction was likely.

Today, the Treasury Select Committee will meet to hear from the Bank of England why there has been an overshoot in its inflation target of 2%. BoE Governor Mark Carney will point to the unusual circumstances of Brexit concerns and the fall in Sterling. The weak nature of economic growth has led to a reluctance to raise rates and this has also led to a spike in inflation.

Dollar fall caused by several factors

The dollar has fallen by a little over 3% against a basket of the currencies of its major trading partners over the past week or so. The main factor is not necessarily the “Russiagate” crisis that is in danger of engulfing Donald Trump’s Presidency, it is the knock-on effect on his ability to pass legislation.

The prime reason for the dollar’s rise since Trump’s surprise election victory has been his “America First” vision which has led to optimism over economic stimulus, tax cuts and increased spending.

The conflict over the sacking of the FBI Director has called into question Trumps ability to work with congress and has led markets to believe that the Fed will put a June rate hike or, indeed any hike this year, on the back-burner.

Trump is attending G7 and NATO summits this week and the concern is that he will continue his protectionist/nationalist rhetoric which will also bring pressure on 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.”