Common currency heading for 1.1700

Having seen a shallow correction to its recent move higher, the single currency is now poised to resume its trend against the dollar and pound. As all traders know, “the trend is your friend” so the Euro will attract plenty of support. The first target is likely to be the high of 1.1715 seen last August.

It is interesting that despite contrasting monetary policy outlooks, the dollar continues to weaken. There is pent-up demand for the Euro which has been dormant since the Fed started hiking rates but now that a pause seems likely, that demand can be satisfied.

This week’s ECB Governing Council meeting is unlikely to shed any further light on the Central Bank’s intentions.

Mario Draghi has been strident in his view that interest rates and the removal of the Asset Purchase Scheme should be treated separately. He sees a tightening via the tapering of the additional measures as sufficient to deal with inflation concerns in certain members of the Eurozone. He is worried that a hike in rates will bring inequality and he is still concerned over weak job growth in certain countries.

The euro closed has broken the 1.1500 level overnight reaching a high of 1.1539.

Brexit talks begin

David Davis the U.K.’s Brexit Minister must feel like a man who has to travel overseas on business but is leaving behind domestic issues that need his attention.

Brexit negotiations began yesterday following last month’s symbolic first meeting. The EU wants an agreement over the Brexit bill and the fate of EU residents remaining in the U.K. before any discussion over the single market begins.

There are over three million EU nationals in the U.K. Their fate together with the fate of those U.K. citizens spread around the EU is a major issue.

Mr Davis is facing key issues at home as the minority Conservative Government continues to tear itself apart over Brexit. Theresa May, the Prime Minister, her position weakened over the election debacle, is facing a difficult summer as her support wanes. Parliament rises for the summer recess on Friday and the focus of attention will be very much upon whether May can survive and the chances of another election in the Autumn.

Sterling remains above 1.3000 against the dollar but has retreated a little against the Euro falling to 0.8825. As the common currency strengthens, a test of 0.9000 is a possibility.

Inflation data to provide MPC with solid evidence

Today’s release of inflation data for June in the U.K. will provide anecdotal evidence to both MPC members and the market about the need for a rate hike.

With two definite votes for a hike, a further vote from the Chief Economist leaning towards a hike and a new member whose voting intentions are unclear, it is likely to be a pivotal meeting. With only eight members until Charlotte Hogg who resigned from the Bank in March is replaced, the outcome is on a knife edge.

Sterling has been trading sideways in a weak uptrend so may have provided a little deflationary support but its rise hasn’t been sufficient to have a material effect on prices. An unchanged 2.9% for the headline consumer price data is the best that the MPC doves can expect whereas 3% or higher will make a rate hike hard to resist despite its negative consequences for growth.

Sterling is facing a tough summer of economic and political headwinds so any further rally will likely attract selling interest.

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Alan is a highly experienced banker with an in depth knowledge of Corporate Banking, Treasury and Trade Finance. He has had a varied career in Global markets, Risk management, FX Trading and Sales & Interest Rate Management. He has managed sales teams mentoring his team in both markets and marketing.He has been published in a number of journals and has appeared daily on radio to discuss market movements and events. His first novel was recently published.