Daily Market Brief 28 June 2017
Daily Market Brief from Alan Hill

Euro Breaks its Shackles

Morning mid-market rates – The majors

June 28th: Highlights

  • Draghi from extreme dove to mild hawk
  • Dollar weaker as Healthcare reform delayed again
  • Sterling breaks 1.2800 but further gains limited

Draghi testing the water

Like a man who has just bought a brand-new car, ECB President Mario Draghi is trying out every gadget and feature. He has become the one Central banker who is not just listened to but whose words are heeded.

On Monday, he was a dove; commenting that the need for a rate hike is some way away and that the stimulus from loose monetary policy creates more uniformity of growth across the Eurozone.

Yesterday, he turned hawkish, commenting that deflationary forces have been replaced by reflationary pressures. This has been taken as an oblique message about the removal or at least reduction of the Asset Purchase Scheme.

The reaction of the Euro to such a relatively bland comment has been almost out of context and is a testament to Draghi’s growing stature.

The common currency has risen by 1.4% this week reaching a high of 1.1356, a ten-month high, against a weaker dollar. Sterling also suffered as the Euro has finally broken and held above the 0.8800 level which had been proving stubborn. The pound fell to a low of 0.8860.

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Trump’s Legislative Issues remain

The ability of President Trump to work with Congress or more likely the desire of Congress to work with him is being tested again.

While Janet Yellen was talking up the FOMC’s decision to hike rates the dollar reacted poorly to delay to a vote on healthcare reform in the U.S.

This Bill, in itself, is not the primary issue. It is, however, further notice that the legislature is prepared to defy the administration and its ability to enact its policies. There are more important battles to come particularly regarding economic stimulus and business friendly measures that should aid the economy and the dollar.

The dollar index fell by close to 1.25% as concerns over delays to economic stimulus putting further rate hikes on hold resurfaced.

Minneapolis Fed President Neel Kashkari voiced concerns over the future path of interest rates asking, “what’s the rush?” He went on to say that since neither wages nor inflation are pointing to an overheating economy a period of contemplation is needed. Well, Mr Kashkari, the Dow Jones Index has risen by close to 40% since its last major correction in January 2016 and has close to tripled since 2009. That may be a clue as to why the FOMC has acted!

Pound awaits political stability

Wishful thinking? Probably. The political landscape in the U.K. may not have changed forever but we are starting to see a pattern of anti-austerity appear. The people have been assailed by cuts to public services, a wage cap in the public sector and healthcare on the brink of collapse without any seeming relief.

Populist socialist policies are starting to resonate and led to the result of the election. The opposition Labour Party have put forward a test motion on lifting the public-sector wage cap to gauge how the minority Government will fare when the vote over the Queen’s Speech takes place.

Prime Minister Theresa May will face an awkward time in the House of Commons later when she faces her first Prime Minister’s questions since losing her majority.

The pound rallied through the 1.2800 level rising to 1.2830 as the dollar fell before settling back to 1.2815. Longer term, parity against the Euro is being discussed. This obviously depends on how Brexit negotiations progress but the divergence of the two economies will certainly have a major effect of the Eur/Gbp rate.

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.”