Euro continues its strong run as odds of QE tapering from ECB increase

The Euro has continued its strong run this morning and has just hit some key levels.

On the view of worsening US economic prospects and an improving Euro-zone outlook, traders have been shifting their holdings out of the USD and into the Single Currency. This weekend’s extensive damage caused by Hurricane Harvey has led some analysts to believe the Federal Reserve are less likely to raise interest rates before the end of the year, as it could impact too much of their economic growth. Furthermore, President Trump’s effectiveness to push through his economic and fiscal plans, which excited the markets upon his election victory, appears to be evaporating. US budget and the federal debt ceiling deadlines are now fast approaching.

A closely watched speech over the weekend by ECB president, Draghi, was a bit of a non-event and there were no new indications of any monetary policy changes discussed. Some traders felt he might use this platform to highlight concerns over the recent strength in the Euro, which could ultimately push inflation levels lower across the Bloc. However, he failed to raise these concerns, which has been seen as a positive for the Euro, as it indicates that the ECB are still on course to announce a cut-back on their money-printing programmes (QE) in Autumn.  Their next policy decision will be made on Thursday 7th Sept.

As a result, the EUR/USD rate has pushed through the 1.20 mark this morning and now trades at the highest levels since the start of 2015. This movement has dragged the Pound down against the Euro, and the GBP/EUR now trades as the lowest level since Oct 2009. The GBP/USD is up nearly 2-cents from last week’s low and currently trades at a 2-week high.

Sterling drops as consumer prices steady

The Pound has fallen today following the release of the latest UK inflation readings.

Consumer prices rose to 2.6% in July but this missed market expectations for a 2.7% increase. This supports the market’s view that the BoE will not raise rates until at least late 2018 or early 2019, which is less attractive to investors seeking higher yields. Although the inflation rates are likely to remain above the BoE’s 2% target, a lot of this can be put down to a weaker Pound. For the BoE to act, they will need to see more evidence of enduring, domestically generated price increases rather than temporary ones (such as currency rates and oil prices).

In other news, US retail sales figures have just been released and they comfortably beat expectations, which has boosted speculation that the Federal Reserve may still increase interest rates before year-end. Comments overnight from Fed policymaker Dudley also indicated that a lot of policymakers remain open to a further hike in 2017. The USD has also benefitted from a cooling of tensions over the tense situation with North Korea.

As a result, the GBP/USD has dropped around 1% today, and is currently trading around a 5-week low and testing support. The GBP/EUR lost around half a cent and continues to trade around very subdued levels (ignoring October’s flash crash, around the lowest levels since Spring 2010).

Next up we have UK job/wage figures out tomorrow at 9.30am and then UK retail sales at 9.30am Thursday. Both will be closely watched and if they disappoint we can expect further losses for Sterling which is trading at vulnerable technical levels.

Pound takes knock as BoE leave rates on hold (with no extra vote rebels)

The Bank of England have just voted (6-2) to keep interest rates on hold at 0.25%, and also lowered their growth and inflation forecasts, which has just knocked Sterling.

Although this was a widely anticipated result (with only 10% odds of a hike), some market participants expected there to be an extra dissenter and for them to look closer to boosting rates from record lows, which has disappointed some Sterling bulls. Clearly the BoE feel the risks of raising rates too soon outweigh the risks of inflation shooting too high. With wage levels remaining stubbornly low and concerns over Brexit, cautiousness is prevailing as things stand.

Earlier in the day, figures showed a very slight expected pickup in the UK’s dominant services sector, which accounts for around 80% of our economy. A manufacturing survey on Tuesday also showed improvement, as a weaker pound is helping exports, which is another sign that our economy is still performing resiliently regardless of the upcoming Brexit situation, albeit very sluggishly.

In other news, the Euro has continued its solid run, as data out of the Euro-zone continues to impress, and the USD has continued to perform badly as investors pare back their Fed rate hike expectations and show concern over the US political situation. This has continued to push the EUR/USD cross towards multi-year highs (see below), however, many analysts are beginning to feel this move is getting a bit overstretched, so we may be due a correction soon. The stronger Euro is also likely to be an issue for the ECB who are concerned with low inflation levels, a stronger Euro means prices are likely to remain depressed.

As a result, the Pound has just lost nearly 1-cent against the Euro and currently trades at a 9-mth low. The GBP/USD is also down about 1-cent.

We have the BoE press conference a bit later today which may provide further clues as to when the next hike will be and further information about their outlook. Then tomorrow afternoon we have important job and wage figures from the US at 1.30pm. However, next week could be a very quiet one with no major data releases due.