ECB approval drives Euro to fresh Highs

Benign Neglect becomes ECB Policy

Last week Mario Draghi, the President of the ECB had two opportunities to express his concern over the strength of the Euro and its effect on the Eurozone economy.

He chose to take neither!

The result of this “benign neglect” has been to relaunch the common currency on a path to new highs. Versus the dollar, it has reached within touching distance of 1.2000 which has been most traders medium term target since break of 1.1280 which only happened in June. Against the pound, the common currency seems destined to reach parity with only technical factors standing in its way.

Both the dollar and Sterling have their own headwinds which is simply providing further impetus to the Euro buying.

Sr. Draghi has been consistent in his mantra that Eurozone monetary policy will be tough for some, suit others but will be consistent and eventually beneficial for all. He has said that any hike in rates would only take place when deemed necessary for all. Traders are also looking for advance guidance over the tapering of the Asset Purchase Scheme and they may receive their wish as soon as next week when the ECB Council meets.

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Brexit talks resume

If one looks at a picture of a U.S. President or a British Prime Minister at the start, then at the end, of their term in office, the images tend to show a remarkable aging process. Two stark examples are Barack Obama and Tony Blair. It is fortuitous that the EU senior negotiator Michel Barnier already has grey hair as there is a real possibility that he would break the record for such changes.

The EU set out very early in the first session of talks that they would not discuss the relationship between them and the U.K. following Brexit until certain milestones had been achieved. The U.K. has countered this by simply continuing to propose various schemes for trade and customs union avoiding the issues of the Irish border, treatment of EU nationals remaining in the U.K. after Brexit and the final settlement figure.

M. Barnier yesterday called for more action and less rhetoric. He warned that UK “ambiguity” must be removed and progress on “separation” issues made before any talks on the future EU-UK relationship. David Davis countered, as markets have come to expect, with more ambiguity.

Sterling continues to suffer as the economy slows as a direct result of the British prevarication which is playing havoc with businesses investment plans.

Hurricane Harvey brings more chaos to U.S. economy

Janet Yellen, the Fed Chair took the same path as her ECB colleague on Friday, choosing not to mention the future path of interest rates or the Fed’s balance sheet. This led to some selling of the dollar but was perhaps fortuitous as the effect of Hurricane Harvey on the U.S. economy cannot yet be gauged. The hurricane has brought chaos and destruction to one of the most important parts of America’s biggest state.

Texas is the home of the majority of oil production and any disruption brought about by damage to the supply chain could take many months to correct and bring a necessity for the Fed to remain on hold.

This week sees the release of the employment report for August and there is a possibility of it being even less reliable than usual. The Department of Labour rarely issues the report on the first day of the month and never in a week that also contains a holiday. This month it will do both.The September report is sure to contain a revision to the August data!

Dealing with what we know, the past two reports have been strong with 200k+ new jobs created. The July report is still subject to revision but it would need a 20% adjustment and that is unlikely.

While the clean-up from Harvey continues, it is unlikely that the dollar will react particularly positively to a strong report and the danger is clearly to the downside.

This week’s events of note

U.K. inflation and Employment data will be the focus for Sterling. North Korea should make more headlines