Daily Market Brief 30 August 2017

Euro continues to climb

August 30th: Highlights

  • Medium term goal achieved
  • Brexit talks turn fractious
  • North Korea and Harvey Damage dollar

Euro rise set to slow

In June when the single currency broke through strong resistance at 1.1280 versus the dollar traders considered the 1.2000 level as attainable but not without a major event or events to drive both currencies. It has taken just 63 days for that target to be reached. The emergence of the Euro as a safe haven currency in the manner of the Japanese and Swiss currencies has also provided a platform for strength.

However, despite the ECB’s contention that monetary policy should be equitable for every Eurozone member, currency strength will start to affect the ability to export for the weaker economies. This will, in turn lead to lower sentiment data bringing a correction. For now, the pace of the move higher is likely to slow as the speculative flows abate.

Should this week’s employment data in the U.S. continue the recent trend of above expectation new jobs being created, traders could use the potential divergence of interest rates as a reason to divest themselves of long Euro positions leading to a correction. It seems that the Federal Reserve is determined to “normalize” rates but is struggling for a reason to do so.

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Brexit negotiations beginning to turn fractious

It is difficult to side with the EU considering its bureaucratic nature and pernickety attitude. However, it is also becoming even more difficult to understand the prevarication of the U.K. The EU has made it perfectly clear what is expected to have been achieved by talks before it will enter discussion of the future relationship between the two.

The exasperation being felt by both Michel Barnier and Jean-Claude Juncker, who weighed into the debate yesterday, is wholly understandable. They have both questioned the seriousness of the U.K.’s intentions

The fall in the pound against the Euro continues unabated even though the “Brexit effect” should now be well priced in.

It is the wider economic and political effects of Brexit that is driving the pound lower versus the single currency. Since the dollar is also suffering, the effect of both currencies woes cancel each other out.

There will start to be genuine fears of a recession in the U.K. should business investment continue to fall. The pound has fallen by almost 7.75% since early June and given the U.K.’s trade deficit with the EU, that is sure to have some effect on inflation.

Dollar under pressure as Harvey costs rise

It is estimated that the cost to insurers of the damage caused by Hurricane Harvey as it crashed through Texas will be in the region of $20 billion. This is however a fraction of the overall cost since most of the damage won’t be covered. The Federal fund which covers damage will fund the balance of claims. This is well below the insured damage from Katrina and Sandy but will still be a drag on the economy.

The longer President Trump continues without producing a fiscal reform and economic stimulus package the less likely a further rate hike this year will be. Economic data is relatively supportive and Q2 growth is expected to be revised upwards from 2.6% to 2.7% but this is not sufficient reason for a tightening of monetary policy.

North Korea continues to bring tension to the Western Pacific Region. Yesterday they launched a missile test which flew over Japan and crashed into the sea. Pyongyang announced that this was a continuation of its development programme, the aim of which is unclear despite their protestations that it is entirely defensive.

The Yen and Swiss Franc rose as a consequence of the rise in tensions and this probably contributed to the further strength of the Euro.

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.”