Summertime is often a season associated with low levels of liquidity as traders swap their trading screens for sunscreen. However it is this period where the remaining market participants can get burnt themselves as often inconsequential events can result in large price movements. Those lucky enough to be enjoying the sunnier climes will have noticed their euro purchasing power has been boosted also. In recent days the euro has found itself up as high as 12% YTD against the dollar and 5% against a basket of currencies in the last 3 months. However while the euro may have started to get carried away, bond markets on the other hand have taken a more cautious approach, and we have already seen the euro begin to move back in line.
The move against the dollar has hastened in the past couple of days on the back of a hawkish statement from Fed President William Dudley, who favoured another rate hike this year, while also saw the Central Bank trimming its $4.2 trn balance sheet later this year. Markets pricing for the odds of a December hike has moved back to roughly 50/50, while CME’s Fedwatch tool are still only indicating one rate increase over the next 12 months. The recent dollar momentum will look to continue if tonight’s Fed minutes mirror Dudley’s comments, and with the markets seemingly still unconvinced? inconvenienced the dollar may see further strength if the minutes signal any hawkish sentiment.
Yesterday’s Retail Sales figure also aided the dollar as the figure posted its strongest growth for 2017. The resulting figure saw, EUR/USD trading as low as 1.1687 earlier in the session, while against the pound it dipped below the 1.2840 level. Markets will be keeping a close eye on the Fed minutes this evening to gauge the central banks thoughts on monetary policy going forward. Any hawkish signals may well see the dollar rally further.
Over in the UK where yesterday we touched on their unrealistic Brexit scenario where they hope for the “freest and most frictionless” trade possible. Markets reaction to the paper was swift, with the pound touching new YTD lows against the euro at 0.9118, while the dollar reversed from the 1.30 level. The UK will need to seriously regroup on their proposal as they are in danger of losing all creditability here. Euro members also criticised the lack of solution regarding citizen rights and the cumbersome financial settlement.
The pound however got some respite this morning when wage growth rose to 2.1 percent vs 1.8 percent expected. The figure closed the gap with inflation which will provide the BoE with some respite, while the unemployment figure also improved unexpectedly to 4.4 percent.