Euro Corrects as U.S. Expands
August 31st: Highlights
- Medium-term target achieved
- Speculation ECB uncomfortable with further gains
- U.S. data points towards dollar recovery
Technical correction dressed as ECB concern
The Euro yesterday corrected from its recent highs against the dollar and pound in a classic reaction to having reached its medium-term target. The breach of the 1.2000 level against the dollar and the failure to break strong resistance at 0.9330 versus brought about the selling.
To explain the fall, analysts looked towards the ECB and manufactured a concern over recent Euro strength. Mario Draghi, the ECB Chairman rarely enters conversation over the strength or otherwise of the currency, viewing its level as a by-product of economic activity and monetary policy. The advent of the common currency joining the Yen and Swiss Franc in attaining safe haven status is a consequence of the region’s’ current account surplus and adds to the currency’s strength.
An ECB colleague of Sr. Draghi, Estonian Central Bank Chairman Ardo Hansson recently commented that the strength of the single currency was unsurprising considering the upbeat Eurozone economy. It is unlikely that this impression is contrary to the view of Draghi or that it isn’t the common view of his colleagues on the ECB Council.
The Euro fell 0.7% against the dollar and has reached 0.9186 against Sterling.
Sterling takes a breath
The confused state of the British negotiating position over Brexit is now well priced into the pound and it is the economy that is driving the currency. Further weak data for August will see the pound resume its path lower and the MPC meeting in two weeks won’t be able to provide support. In fact, given the parlous state of the economy there may be calls for a further loosening of monetary policy.
Inflation was, until recently, the major concern for the Bank of England. The reality of Brexit is understood by business but the lack of clarity over the path from today’s position to exit from the EU is driving business sentiment and investment lower.
Sterling remains hugely undervalued on a trade-weighted basis but as confidence ebbs away and the gap between wages and prices remains, further falls remain the most likely outcome.
Parliament returns from its summer break next week and with the Conservative Party Conference looming we can add politics to the mix and that is unlikely to be supportive for the currency.
U.S. GDP springs a surprise
Added to this was an upbeat report on private sector jobs which is a precursor of tomorrow’s nonfarm payrolls report. Market expectation has been heightened by the most recent releases both of which have reported 200k+ new jobs. Yesterday’s ADP report will have done nothing to dampen expectation over tomorrow’s data.
Further strong data releases will bring greater support for the dollar and fuel expectation for another rate hike. It had been usual that the Fed never hiked rates in December or in the wake of an election but given both traditions were broken last year, speculation over a further hike in December this year will return as activity improves.
It is a testimony to the amount of liquidity in the market that the reaction to the strong data was fairly muted and it remains to be seen how far the correction against the single currency can go.
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.”