Chance of Tighter Monetary Policy Boosts Sterling and Euro

Central Banks draw same conclusion

It would appear that researchers and policy advisers have come to the same conclusion. The global financial crisis is definitely over and, perhaps more importantly, they believe that policies are in place that mean it cannot happen again.

Janet Yellen the FOMC Chair at a conference in London last week commented that she believed the world wouldn’t see another such crisis in our lifetimes. That is a big call given that the “too big to fail” global banks have managed to resist calls for their influence to be curbed without safety valves put in place.

We are still some way from a global economy that is growing to such an extent that tighter monetary policy will become the norm but the bias is shifting.

The Euro has climbed to a fourteen-month high against the dollar reaching just shy of 1.1450 as previous resistance levels gave way. There is now strong support at 1.1280 and 1.1200 so any correction should be shallow.

Mario Draghi and Mark Carney, Heads of the ECB and BoE respectively, both spoke at a conference in Lisbon last week and, in their own way, ushered in a new era. Their motives are poles apart but their sentiments are the same.

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Euro gains not limited to Monetary Policy change

The first half of 2017 started with a major concern about the political direction the region was taking following populist victories in several votes culminating in Donald Trump’s stunning victory.

Victories for Mark Rutte in the Netherlands and Emmanuel Macron in France showed that the political will to forge a “New Europe” is strong and growing. Germany goes to the polls later in the year to re-elect Angela Merkel for a fourth term and the potential crisis in Italy has abated. The Eurozone has also been handed a boost by the political turmoil in the U.K. weakening the ruling Conservative party’s Brexit bargaining position.

Mario Draghi remains cautious over the inflation outlook feeling that until inflation returns to close to the ECB’s target of 2% region-wide any change to interest rates runs the risk of bringing about an inequality where the nations of the west; Germany France Belgium and the Netherlands continue to grow but those of the east where growth is patchier could easily fall back into recession. He wants to keep accommodation, if possible, but has conceded the need for a normalization by reining in the Asset Purchase Scheme.

U.K. facing tough summer but Political storm abates

Theresa May the U.K. Prime Minister had a June she will want to forget in a hurry! She was, to a certain extent, blindsided by an election result that was every bit a surprise as Brexit and Trump. Handed the poison chalice of having to defend a Brexit decision taken by the nation but for which she hadn’t campaigned it seemed that she had been set up to fail.

This was very nearly the case as the Government lost its majority and she was blamed for a lacklustre and unpopular campaign. Several issues culminating in the terrible Grenfell Tower fire weakened her almost to the point of departure. However, last week’s deal with the Northern Irish Nationalists followed by wins, albeit, small ones, in important Parliamentary votes has bought her and her Party some breathing space.

Parliament rises for the summer recess on July 21st and there is now certainty that the Government will survive at least until then.

Sterling has performed well over the past week, rising against both a weaker dollar and a rampant Euro.

Against the Euro, the pound remains supported at and just above the 0.8800 level and closed on Friday marginally stronger at 0.8772.

This week’s events of note

A week of data releases will be inevitably dominated by the U.S. employment report on Friday. Prior to that traders will be looking for data to back up recent hawkish Central Bank comments