Euro strengthens as ECB comments bring prospect of ECB rate hike forward

The Euro has jumped to a one-year against the USD following some upbeat comments from ECB president, Mario Draghi.

Draghi said that he sees there being room to start normalising monetary policy by paring back their quantitative easing and increasing interest rates (in time). Other members of the ECB have made similar comments recently but these remarks were more positive than the market had expected from Draghi which increased the appeal of the Euro and pushed the EUR/USD through some key resistance levels, causing a technical rally.

Weakness in the USD also encouraged this breakout in the EUR/USD cross, as Fed Chairwoman Yellen gave a less optimistic tone in a speech last night. Voting in the new proposed US healthcare bill has also been delayed which supports the view that the new US government lacks the ability to approve new policy changes.  This notion has been taken into account by the IMF, who cut US growth forecasts as they took Trump’s fiscal stimulus plans out of their equations, stating that they will struggle to hit his targets.

In other news, the Tory/DUP alliance has finally been agreed to much contention. Upon announcement Sterling temporarily firmed slightly but it was widely anticipated and quickly gave back any of these gains.

As a result of this, the EUR/USD has pushed up 2-cents from yesterday’s low. This dragged the GBP/EUR down 1 cent from yesterday’s high and it currently trades at the lowest levels since November last year (7-mth low!). The GBP/USD is up 1-cent from yesterday’s low and now trades close to a 3-week high.

Pound drops as Carney says now is not the time to raise rates

Sterling has taken a hit today after Bank of England Governor, Mark Carney, said that it was not the right time to start raising interest rates.

Last week, three out of eight BoE policymakers voted to hike the main interest rate this month which was unexpected and boosted the Pound. It indicated that the central bank were starting to lean further towards hiking rates than the market had priced-in. Today’s comments – although not that unusual from Carney – reminded the market that they are still quite a long way off making any changes and until people start getting earning more they’re likely to continue sitting on their hands and preserving these record low interest rates. By maintaining this ultra-loose monetary policy, it’s clear he’s taking a cautious approach in case Britain doesn’t get the best deal from the negotiations.

After losing her majority earlier this month, Theresa May is still yet to formally agree a deal with the DUP and with this dual level of political uncertainty it means the Pound is very sensitive to any bad news/data (hence today’s amplified move). One thing is for sure and that is we are likely to continue seeing increased volatility over the upcoming months, as the Brexit negotiations are now officially under way.

As a result, the GBP/EUR rate has dropped 1-cent from this morning and now trades at a 1-week low. The GBP/USD is down around 1% and now trading at a 2-mth low. There is little data out this week, so the rates are likely to take their direction from political news and events.