Daily Market Brief 26 April 2018

Dovish ECB unlikely to support Euro

April 26th: Highlights

  • No desire to tighten monetary policy
  • Sterling struggling as rate hike hopes flicker
  • Dollar rebound continues as yields approach seven-year high

Single Currency testing major support

The Euro is trading at the bottom of its perceived medium-term range as the ECB meets today to discuss monetary policy. Despite the odd murmur of discontent, the majority of General Council Members support President Mario Draghi’s often stated view that interest rates should remain low and additional accommodation should remain in place to support the weaker Eurozone countries whose economies continue to struggle to find growth.

It will take decades for the Eurozone economy to find its natural levels of growth, inflation and unemployment that enable analysts to make valid calls as to what levels of activity signify expansion or otherwise. By the standards of the developed world, the unemployment rate in the Eurozone is high but with several negative factors still contributing and free movement still not fully accepted, that may be the “norm” for many years.

The Euro reached a low of 1.2159 yesterday as it managed to find support at the exact point traders view as its medium-term support. It has rallied a little overnight but there are very few positive factors to affect its path in the face of a stronger dollar.

With the outlook for inflation remaining benign and the ECB preferring to continue a reactive stance there is little prospect for a sustained rally until price increases return to a level close to the Central Bank’s target of 2%.

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Sterling at a crossroads as faint rate hopes remain

Regular readers will be aware that I consider a rate hike at next month’s Bank of England Monetary Policy Committee meeting to be a dangerous move for the U.K. economy which when views in conjunction with the uncertainty brought about by Brexit could spell disaster for the economy.

Despite the words of BoE Governor Mark Carney last week and the soft economic data releases, particularly inflation which is now well below the high of 3.2% seen recently, there are still supporters for a rate hike. The MPC tends to vote in accordance with the public wishes of the Governor since he will tend to have had conversations with his colleagues at the Bank who also serve on the committee before “going public”. However, there are two confirmed hawks and two or three “waverers who could be persuaded that a hike is still necessary next month.

Sterling is unlikely to break lower prior to May 10th (the date of the meeting) but is also not sufficiently supported, without a major positive influence, to rally to far. The path of economic data is now well understood so the medium-term fate of the currency appears to hinge of the short term path of interest rates.

It reached a low of 1.3923 versus the dollar yesterday but remains supported against the single currency reaching a high of 1.1456 as the Euro also struggles with dovish monetary policy.

Resurgent dollar makes new 2018 high.

The dollar index which charts the strength of the dollar versus a basket of six of the U.S’ major trading partners is by most analysts reckoning totally outmoded but it still serves as a useful barometer of the greenback’s performance. It has been rumoured that Treasury Secretary Steve Mnuchin, favours a revamp of the index but since his appointment has been trying to keep up with the Presidents trade policies and criticisms of currency manipulation some of which are genuine while others are merely tactical.

Yesterday the dollar index reached 91.26, its highest level since mid-January as the yield on ten year Government bonds breached 3%., reaching a high of 3.035, close to the seven year high of 3.041. Concerns over the amount of new issuance of bonds to fund major domestic infrastructure projects are the main reason for the fall in prices and the consequent rise in yield.

With talk resurfacing of a rise in short term rates being considered for the June FOMC meeting the dollar is likely to remain well supported as other G7 Central Banks continue to be unconcerned by the issue of rising inflation. Some observers see next week’s wage growth data, due as part of the employment report on Friday as a key determinant of the Fed’s intentions.

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.”