Target achieved but can it continue?
If asked in June when the common currency broke through resistance at 1.1280 versus the dollar, most traders would have set a medium-term target at 1.2000. This has no particular significance other than its psychological effect but was a sensible target nonetheless.
The fact that that target has been reached in 45 trading days owes such an achievement to several factors each of which have conspired to provide impetus.
The political situation has calmed down since the French election and with Angela Merkel looking certain to be re-elected, that situation is likely to continue. The economy continues to do will with growth starting to appear while inflation remains benign. The strength of the currency is being treated with benign neglect by the Central Bank and given the region’s current account surplus, the common currency is starting to achieve, in line with Japan and Switzerland, safe haven status.
Of course, traders are never satisfied once a target has been reached and are eager for the next one. It is hard to imagine the rise in the Euro continuing unabated. There will be very few traders who will imagine, for example, a Euro at 1.2500 at year end. The widening of interest rate differentials, brought about by improved data and a stimulus package.
Brexit negotiations turning tough
The third round of negotiations between the U.K. and EU over Brexit have become more difficult with each side blaming the other as is usual in a divorce.
The U.K. says that the EU is placing too much significance on the bill for departure while the Eu says the U.K. is prevaricating over the three issues that need to have seen progress for any discussion over a future relationship can start.
Both sides seem to be intent on a “hard Brexit” as neither plans any concession to the other. Davis Davis the U.K. Brexit Minister is mindful of the Political uncertainty at home and despite a seeming softening of the attitude to Brexit, a clean break is the desired outcome of the majority of “leavers”. This contrasts with the attitude of business where the lack of clarity is causing a dramatic fall in investment. A transition period is being clung onto as the only way in which companies can plan and prepare for life after the EU. A certainty of how they will be expected to operate post Brexit with a defined date will allow business to be more confident in the future.
Harvey Trumps Pyongyang
The devastation caused by Hurricane Harvey was seen first-hand by Donald Trump yesterday on a visit to Texas. The cost of the storm to insurers is estimated at around $ 20 bio., well below the cost of either Katrina and Sandy. This is, however, only a fraction of the entire cost as uninsurable claims will be covered by the Federal Government. This will add a drag to economic growth which while not significant will enter the thinking of the Federal Reserve.
While the President was visiting Texas, North Korea launched a further missile test. The rocket flew over Japan and crashed into the Western Pacific. Tokyo showed restraint, clearly at the request of Washington, by not shooting down the missile as a threat to its airspace.
The dollar reacted true to form falling not only versus the Swiss Franc and Japanese Yen but also against the Euro which is starting to achieve safe haven status.
President Trump was quoted as saying that all options are on the table as far as North Korea is concerned but he is clearly concerned about the attitude of China, Pyongyang’s only ally in the region.
