Support and resistances becoming a little blurred
So far this week we have seen the type of market where retail traders blame banks for “sniffing out” their stops. We have seen a series of overshoots most notably in Eur/Usd where the apparent support at 1.2280 was overshot taking out several longs before the market rallied back above 1.2320. Frustrating? Yes. Deliberate? No.
Conflicting signals have also been a factor of the trading landscape this week, but one constant returned yesterday. As has been the case for almost a year, when Brexit isn’t in the news, it tends to get “brushed under the carpet” and traders tend to concentrate upon more encouraging words from Bank of England officials designed to give credence to a potentially worrying tightening of monetary policy.
Yesterday Brussels announced that it was not going to allow the UK to have a sliding scale of compliance with EU legislation during any transition period. This is going to be a major issue particularly as UK Prime Minister Theresa May is apparently leaning heavily towards a far longer, possibly open-ended transition period. Any such announcement will anger Brexiteers in her cabinet as they will see it as “leaving the EU without leaving the EU”. Such a scheme would only would if Brussels agreed on variable compliance.
Euro Strength a continued concern
The President of the Belgian Central Bank and ECB Council Member Jan Smets yesterday gave support to his bosses concerns over the effect of euro strength and currency volatility in general on monetary policy.
Smets said that he accepted currency strength because of strong economic fundamentals but when it is due to a devaluation policy to increase competitiveness then it is unacceptable. It seems that as the global economy starts to grow again there is going to be a significant focus on how nations gain an edge in their export markets. This clearly follows on from the Trump/Mnuchin show in Davos.
Smets is also concerned about the ability of the ECB to formulate a monetary policy which sees inflation rise closer to its 2% target. It is interesting to note that should inflation start to rise, the clamour, from Germany in particular will grow increasing loud. However, any such move in monetary policy will dampen inflation but also lead to a far stronger common currency since it will mark the beginning of the end of the dollar’s interest rate differential advantage.
Yesterday’s test of 1.2280 support won’t have brought too much comfort to Frankfurt although a benign read for inflation when it is released next Wednesday may at least hold the Euro at lower levels.
Powell speech to provide guidance in several ways.
Newly appointed Chairman of the Federal Reserve, Jerome Powell will make his first policy speech next week although he will be guarded in his direct references to inflation, growth and monetary policy.
It had generally been expected that Powell would be more pragmatic and “forensic” in his approach to interest rate rises but there was nothing in the most recent Fed minutes that justified that sentiment. It seems that the Fed will raise rates three time this year with the possibility of a fourth late in Q4 should the situation demand.
The normalization of monetary policy was one of the main requirements of President Trump when he nominated Powell despite his (Trump’s) almost impossible to fathom criticism of Powell’s predecessor Janet Yellen.
In most Presidency’s, the appointment of a lawyer rather than someone with a background in economics could be progressive. However, in this case it seems that Trump was struggling to find like-minded candidates with the necessary credentials.
Powell may touch on the dollar during his speech. In the past this has been off limits as the Treasury has always been responsible for the greenback but with a blurring of the lines between Mnuchin and Powell (at Trump’s behest) we may see a whole new methodology from the administration.
