Sanguine Draghi drives Single currency
The long-awaited ECB meeting where Mario Draghi was supposed to announce the commencement of the tapering of the Asset Purchase Scheme and talk of his concern over the strength of the Euro took place yesterday but it seems that the ECB President failed to learn his lines.
He informed the press that any discussion over the start of the withdrawal of extraordinary measures would take place in October and while he acknowledged that the currency was a factor in making forecasting difficult, he avoided expressing a particular concern.
He acknowledged that inflation is benign and said the currency is a factor when looking at modelling future policy. He continued his dovish outlook not even considering removing the easing bias from the Bank’s outlook.
This sent the Euro higher, particularly versus the dollar where the 1.2000 level was easily breached and the single currency reached 1.2090.
Any disappointment felt over a lack of tapering was quickly overcome although the rise was exacerbated by a weak dollar which is being buffeted by several forces figurative and literal.
The Common currency managed to rise close to the 0.9200 level against the pound but its momentum is slowing due to the lack of new factors.
Sterling calm as Brexit turns political
It is testament to traders waning interest in Brexit that as a major milestone was reached the reaction of the pound was muted. The Bill to repeal the 1973 act which took the U.K. into the Common Market and to enshrine EU laws into the U.K. statute book began with an entirely predictable exchange of barbs between the Brexit Minister and his opposition counterpart.
Labour are accusing the Government of a “power grab” in creating a bill that gives ministers to decide any changes to EU laws without prior reference to Parliament. This betrays a lack of alternative policy suggestions on the part of the opposition since it is resorting to turning Brexit into a party-political issue.
The Government will be concerned about how the vote goes since Labour have already said that their MP’s will vote against the Bill in its current form. Any rebellion, no matter how small, by Government MP’s could lead to a defeat which could have profound consequences for Theresa May. The working majority of just six makes any close call a major issue.
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Dollar turns weaker as rate hike hopes fade
It took the market a few days but it finally got the message that last week’s employment report was weak. Not only were just 156k new jobs created in August but the July headline, which brought about an expectation that a further rate hike this year would happen, was revised down by more than 10% to 189k.
In the past, it was said that at least 250k new jobs had to be created a month for the economy to be growing. Since the unemployment rate has fallen below what was considered full employment at 5% that number has fallen to around 200k.
The fading expectation of a rate hike has taken away one of the main supports for the dollar and yesterday the dollar index fell to a level not seen since January 2015. President Trump has gone into full campaign mode seeing the Texas hurricane disaster as an opportunity to show his “Presidential side”. This has seriously backfired been seen for what it is a purely politically motivated action lacking in the genuine compassion of his predecessor.
It is the economy, however, that is causing concern. Sentiment indices remain weak and inflation is likely to remain below target for some months to come. Further dollar weakness can be expected as the common currency restarts its journey towards 1.2500.
