Strong data and calls for policy tightening lift single currency
It is unusual for an ECB Council Member other than Mario Draghi to comment on monetary policy and when they do, they tend to be supportive of discussions that have already taken place “behind closed doors”. Therefore, a speech by Sabine Lautenschlaeger yesterday drew more attention and a possible shift in ECB policy was detected.
It is difficult to ascertain how hawkish or otherwise members of the Council are, since their views are not often aired in public. Ms. Lautenschlaeger is a former Vice-President of the Bundesbank so can be expected to be slightly hawkish about monetary policy. Yesterday she added her weight behind calls for a quickening of the pace of the roll-back of asset purchases in 2018 a matter that is due for discussion at the next ECB meeting. Ms Lautenschlaeger could be “getting her retaliation in first” should Sr. Draghi feel that the current political unrest warrants caution.
Appreciably stronger than expected German Industrial Production data also gave a boost to the single currency which rose to 1.1768 well above strong support at 1.1680. The Euro has been in the background a little since the Catalan referendum but with solid growth further rises can be expected towards the end of the year.
May shows two sides to her Brexit persona
Theresa May, the British Prime Minister, has made no secret of her remain credentials as she has tried to steer the U.K. towards a soft a Brexit as possible. She clearly believes that this would be the most business friendly outcome but circumstances and her colleagues have conspired against her. With hindsight it would have been almost impossible to agree a soft Brexit with the EU as their demands are almost designed to push the U.K. into a corner.
A major tactical error was made by David Davis in accepting the demands for three major matters to be agreed before the future relationship could be discussed. It was unreasonable for the EU to make these demands in the first place and that is what has led us to the position the negotiations now find themselves in.
While briefing Parliament yesterday, Mrs May appeared to try to harden her stance somewhat virtually abandoning the compromises promised in Florence recently which, in any event, have fallen on “stony EU ground”.
May appears to have survived the first onslaught of calls for her to be replaced and it is unlikely that the rebels will have retreated completely. The weekend attempt at a rebellion was weak and ill-judged since it was clear that no senior member of the party was prepared to spearhead such a campaign running the risk of ending their political career.
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Dollar continues to gain support from likely rate hike
If a negative employment report cannot blow the likelihood of a rate hike off course, then it is pretty much a done deal. It is fast becoming perceived wisdom that a rate hike in December is just what is needed for the U.S. economy not to overheat in the coming year. Whether macroeconomic data, President Trump and other, outside, influences will also support that view as we go forward is open to discussion but for now the dollar is well supported despite its inability to break above strong resistance at 94.40.
The waning influence of the headline employment data could not have been better illustrated than following Friday’s release where the negative number was overshadowed by appreciably stronger wage inflation. Data which has suddenly become en-vogue on both sides of the Atlantic.
If Congress can pass the changes to Fiscal policy and President Trump can introduce an economic stimulus package, the likely new Fed Chairman will have a tough first year raising rates almost before he has sat down in the “big chair!
Raising rates has not been a subject that Central Banks have had to contend with much recently and it is entirely plausible that Mario Draghi could leave the ECB at the end of his tenure never having hiked interest rates.
