Euro in Corrective mode

Euro awaits further developments

The recent strength of the Euro has abated a little over the past week as traders have taken stock of the potential drivers of further possible appreciation.

The ECB Governing Council meets later this week and expectation is growing that some movement will be seen on the tapering of the Eur 60 billion Asset Purchase Scheme that was put in place to bolster liquidity during the Financial Crisis.

Mario Draghi the ECB President is known to be “dovish” about changes to monetary policy until the region is growing consistently. Rate hikes are off the table for some considerable time but the Asset Purchase Scheme seems to be starting to become unnecessary.

Data releases have been generally supportive although forward looking sentiment indexes have moved from growth to consolidation.

Rather counter intuitively, Friday’s U.S. data confirmed that the common currency is in corrective mode. The employment report showed fewer new jobs were created in August that had been expected by analysts and the previous headline was also revised considerably lower. Despite this the dollar still managed to end the week with a positive feel.

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Brexit and Politics continues to dominate Sterling

The weekend press in the U.K., as is often the case, carried news of various plots, intrigue and speculation regarding both the fate of the Prime Minister and various rumours over Brexit.

One had an editorial which suggested that Theresa May has agreed to offer a maximum staged payment totalling £50 billion to the EU to kickstart talks over the future trading relationship between the EU and U.K. However, if other articles are to be believed, Mrs May won’t last long enough to make these decisions since she has angered “back-bench” MP’s with her assertion last week that she is “here for the long haul” and her seeming determination to lead the Party into the next election.

Sterling recovered a little last week against the Euro reaching 0.9150 although there remains very little reason to buy the pound in the short or medium term.
Michel Barnier was in a rather patronising mood over the weekend. Addressing a conference in Italy he said that the U.K. population didn’t understand the seriousness of Brexit and promised to “educate them”. He went on to say that the fate of the EU was infinitely more important than the departure of one nation.

Kim and Trump come closer to collision

North Korea appears to have made a huge advance over the weekend in its controversial nuclear weapons programme. It exploded a nuclear device underground which shook the ground in China both figuratively and literally. It was announced by Pyongyang that they now had the capability to fire a nuclear armed missile “all the way to the U.S”.

The response from the U.S. administration was unsurprisingly immediate and warlike, threatening a massive military response.

In China where the President was hosting an international summit the response was a little less strident but no less certain. China is concerned over the humanitarian crisis should Kim push Trump too far.

The dollar index which was already in recovery mode continued its rally although the Yen drew some support as risk appetite fell.

Elsewhere, there are rate setting meetings in Australia and Canada this week. The RBA is likely to remain on hold a little longer since data has been a little mixed. At its last meeting, the BoC raised rates and following last week’s appreciably stronger than expected GDP data a further hike cannot be ruled out.

This week’s events of note

Friday’s U.S. employment data and Brexit will continue to dominate. Expect some comment regarding the Prime Minister’s job in the weekend press. Oh, and it’s Labor Day in the U.S. a week later than published.