Market News & Insights
25 September 2018

ECB Draghi Inflation Comments Supports the Euro

As the days and weeks go by without resolve, it is becoming increasingly clear that Brexit negotiations could indeed fail. Theresa May alluded to the idea of a ‘no deal’ in her speech on Friday where she took a notably bullish tone. If stories out of Salzburg are to be believed, it was this bullish tone that resulted in the other EU leaders giving her the cold shoulder. It is hard to know who the guilty party is in these negotiations as prior to last week’s summit, EU leaders had spoken about a bespoke deal be on the table. However it has now become apparent that neither May’s Chequers proposal nor a Norway/Canada style exit will suit either party, and it feels like talks have now come to a stalemate. While the UK economy appears to be holding up for now, it would be a huge risk for the government to exit the EU without a deal in place. We only have to go back 40 years to when the UK was last bailed out by the IMF during the 1976 financial crisis. While the economy is far better grounded today, the past should serve as a reminder of the vulnerabilities.

President Tusk has also tightened the deadline for a deal on the backstop. Stating that unless we see significant progress by the October summit then he would not call a summit in mid-November. In the currency world, EURGBP no surprisingly is acting as the temperature gauge for where the Brexit process stands. No surprises too that EURGBP spiked higher on Friday peaking at .8992 (GBPEUR low 1.1121), yesterday whilst failing to push on through the 0.9000 mark it has managed to hold much of its ground and continues to trade close to those highs at .8964 currently. Looking at GBPUSD also, sterling also experienced a big sell off on Friday as would be expected with the rate trading down as low as 1.3050. However, general dollar weakness ensured the major pivot line of 1.3000 didn’t come into play. Yet again, last week’s major price action and political roller coaster shows how important getting your hedge policy in place ahead of the coming key months for the Brexit process.

In the Eurozone, Mario Draghi looks to be back to his old tricks where he lets his words do the work. Markets for now appear happy to obey too on the back of his speech yesterday with the euro up 0.6 percent against the dollar at 1.1815, its highest level since June. At the ECB’s September meeting he set the tone stating the uncertainty surrounding the inflation outlook is receding and expected underlying inflation to pick up and to gradually rise towards the end of the year. Draghi came out with a similarly hawkish tone yesterday stating that there was a “relatively vigorous” pickup in underlying euro-area inflation, and signaling that the ECB is well on track to raise interest rates late next year. The ECB looks on track now to end it bond buying program in December and if Draghi’s statement is to be believed, increase rates next year. EURUSD opens back lower this morning at 1.1751 but a strong close above 1.18 is needed in order to bring other key resistance levels into play and open up 1.1850/53 and then 1.1949. For now, supports sit at 1.1725, 1.1700/05 and 1.1670.