Traders ready for correction.
The almost one-way direction that has seen the Euro rise to 1.1910 without any meaningful correction means that, in a comparable way to an elastic band that is being stretched to breaking point, a severe reaction is not only possible but becoming likely.
Today’s U.S. employment data the traders favourite and the analyst’s nemesis could provide such a reaction. Even a 2% fall for the Euro versus the dollar would still leave the trend intact.
The June headline number was a strong +222k new jobs and anything close to that again without a major correction could be the key. The data is notoriously fickle subject to up to 30% revisions. Analysts are predicting a +183k headline number although the report will be scrutinized for changes to hours worked and hourly earnings for signs of growth and potential inflation. Next week sees the release of inflation data expected to be well below 2% which is considered as the threshold for rate rises.
Political considerations have been the major driver for the dollar and those show no sign of abating (possibly for the next three and a half years) so any fall in the Euro is likely to be corrective until new factors emerge.
Downbeat MPC leaves Sterling weaker.
A month or so ago there was a real possibility that yesterday’s MPC meeting would raise interest rates. Growth was not as bad as had been thought and inflation was approaching 3%. In the intervening period, Q2 GDP has been released and the IMF has reduced its GDP prediction for 2017. Inflation has fallen back to 2.6%, no longer threatening to rise above 3%.
Therefore, the MPC saw no reason to consider a rate hike voting by six to two to remain on hold. The two dissenters Michael Saunders and Ian McCafferty were unable to garner support since arch dissenter Kristin Forbes left to be replaced by the more dovish Silvana Tenreyro.
Sterling, which had already resumed its slow fall against the Euro following a recent correction managed to sprint through the 0.9000 level reaching 0.9050. There is currently little to endear the pound to investors so any hardening of Brexit talk into the Autumn could lead to talk of parity sometime in 2018. The pound also fell against the beleaguered dollar, reaching a low of 1.3110. This is, however, still well above the psychologically important 1.3000 level and should continue to aid in the fight against inflation.
Grand Jury on Russiagate unlikely to be dollar positive.
A Grand Jury has been convened in the U.S. to hear evidence regarding President Trump’s sons meeting with an official of the Russian Government in the run-up to last year’s election. There is a widespread and growing feeling in Washington that Russia attempted in some way to affect the outcome. It is ironic that Trump has been forced to sign off this week on further sanctions on Russia, hardly the outcome Moscow would have expected from its perceived meddling.
The dollar continues to fall, seemingly well on its way to a target of 1.2000 which is the medium-term goal of traders. It reached 1.1910 on Wednesday and is showing no signs of a meaningful correction. The current level is the highest in two years despite a widening of interest rate differentials following two rate hikes this year.
Non-Manufacturing activity data released yesterday also dealt a blow to the greenback unexpectedly falling to 53.9 from June’s 57. This still shows expansion but activity is clearly slowing.
