Markets continue to be kept on their toes after the ECB President Mario Draghi continued to abstain from commenting on recent euro strength. He stated that the rise in the single currency was a ‘source of volatility’ which would be monitored, but refrained from talking down the single currency as many analysts had anticipated. This notable absence saw the euro hit a two and a half year high against the dollar, while also climbing further against the pound.
The ECB did however revise near term growth higher to put the eurozone on track for the fastest growth since 2007, but inflation forecasts were cut by 0.1%. Euro hawks haven’t needed much in the past to fluff their feathers, and even with Draghi cautioning that the Central Bank stand ready to increase their asset purchase programme, the euro continued to soar. While Draghi’s rhetoric continued to remain quite vague on the issue of QE, he revealed that the Governing Council would make the “bulk” of its decisions on tapering its €60bn-a-month QE programme in October. We will now have to turn our attention to individual policy makers here to gauge their thoughts
Over in the US and yesterday we saw the dollar under pressure after a speech from New York Fed President William Dudley, one of the country’s most influential monetary policy makers, tone down his previous hawkish approach. While he continued to reiterate the need to continue raising rates, he did not repeat his assertion from 3 weeks ago where he called for another rate hike before the end of the year. He continued to stand by his hawkish sentiment, but accepted that the Fed committee had shifted to a more dovish outlook as inflation and wage growth continue to lag. Treasury yields also fell to 10 month lows as markets appear to have taken the chances of any further hikes off the table.
Political tension also gave markets reason to favour safe havens over the greenback, with gold hitting its highest level in over a year. We expect this tension to continue over the weekend with North Korea potentially using the country’s national day as an excuse to launch further missiles.
In the UK, we had some mixed economic data out with July construction output falling 0.9% against a forecast 0.2%. While manufacturing output for the month grew 0.5% against 0.3% expected. The pound has found itself being influenced by its other major peers and this looks set to continue.