Draghi to reiterate concerns

Earlier in the year, President Trump accused Germany and by inference, the entire Eurozone of benefitting from a weak currency to gain an advantage in world trade.

From a very low base at the start of the year where it reached a low of 1.0340 against a dollar that was buoyed by a (misplaced) view that Donald Trump would deliver on his election promises the common currency has risen by 12%.

ECB president Mario Draghi has continually played down the growth pattern of the Eurozone, preferring to highlight the areas of concern. The Euro has gained 3% since he made a speech in Portugal which was interpreted as a warning of a rate hike.

He was quick to point out that a tightening of monetary policy does not necessarily mean a rate hike. It is likely that he will provide advance guidance today of the tapering of the additional measures adopted to stave off recession at the height of the financial crisis.

Draghi remains concerned about the effect a rate hike would have on the Eurozone members with weaker economies commenting that it could bring about inequalities.

BoJ remains on hold

An interest rate hike in Japan is a rarity. The last hike was in 2006 and that was reversed in 2008. Prior to that rates were raised in 2000 and overall rates have been 2% or lower since 1992. It is safe to say that Japan is unique in that it has a low interest rate economy and the Bank of Japan is not afraid to adopt unique policies to stave off the threat of deflation.

The Yen continues to fluctuate and given the status of the currency as a safe haven its strength in times of global crisis, the effect on its trade can come close to disastrous.

Overnight the Bank of japan met and it is no surprise to say that rates were left unchanged at -0.1%.

In Australia, the AUD rose to multi year highs as economic data led to a belief that a rate hike is not far away and this view was fuelled by a more hawkish statement from the RBA as they, as expected, left rates on hold.

It is now a few months since it was confirmed by the RBA Governor that rates had bottomed out so in typical fashion traders now expect a hike.

Sterling holds 1.3000 as rate hike hopes fade

Bank of England Governor, Mark Carney has maintained a stoical response to mounting concerns over inflation that seemed to be out of control. His view that last year’s 20% fall in Sterling was both unprecedented and the primary reason for inflation crashing through the Government’s 2% target and continuing to rise.

It was only to be expected therefore, that a better read for inflation would bring a similar response. Carney has maintained that economic data is a snapshot of the economy at any given point and needs to be considered as part of a sequence.

The pound has benefitted from dollar weakness to remain above the 1.3000 level it breached recently. Since the fall in Sterling was blamed for growing inflation it is just as reasonable to expect it to fall as the pound strengthens.

The dollar is, however, only part of the makeup of the value of the pound and against the Euro it continues to weaken. Following a shallow correction last week, the common currency now looks likely to test the 0.9000 level. A doomsday scenario of a failed Brexit where the U.K. leaves the EU without a deal, could bring about parity.

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