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Draghi Gives Euro A Shot In The Arm

Published 07/21/2017, 05:21 AM
Updated 07/09/2023, 06:31 AM

Euro claims two-year high after bullish ECB meeting

Those who bought the euro at the beginning of the week will be feeling smug this morning – the single currency struck another year-to-date high against both the US dollar and sterling. Mario Draghi and his board, while keeping policy unchanged, made it clear that discussions over a tapering of their PSPP program (yet another name for quantitative easing) are imminent and could come as soon as the autumn.

One particularly striking feature of the press conference was just how upbeat the ECB now are on the Eurozone economy – and it’s difficult to disagree. With a Brexit-shaped cloud hanging over the UK and a sclerotic White House impeding the US, the Eurozone’s a rare example of an economy that’s beginning to look rosier. These may be famous last words, but if the Eurozone’s firm economic performance in the first half of this year extends into the end of 2017, it’d be difficult to imagine the ECB won’t want to put their foot on the brakes.

Following the conference EUR/USD topped 1.16 for the first time since mid-2015, but there’s still a way to go before the rate challenges levels seen in 2014, where the euro almost topped 1.4 US dollars. With the bulk of ECB action now out of the way for the summer, focus will turn to regular datapoints to gauge whether the Eurozone’s on track. PMI figures due on Monday next week will fit this requirement nicely.

Where we’re going, we don’t need savings

Whatever the financial conditions, it’s very difficult to prevent a sun-drenched UK consumer from opening their wallet and that showed in yesterday’s retail sales figures. The monthly number was just ahead of expectations at 0.6% – not stunning growth, but considering the wage picture, not unimpressive.

While inflation slowed on Tuesday, it’s unlikely this was the primary driver of sales growth (most of the disinflationary pressure came from fuel and energy). The record-low savings rate of just 1.7% of household income (a significant drop from 6.1% seen a year earlier) has been very supportive which, while great for the High Street, may come back to bite if economic conditions worsen. GBP/USD fell back below the 1.30 mark following the release.

No agreements, no surprises

Liam Fox, the UK’s international trade secretary, dubbed a post-Brexit trade deal with the EU as “one of the easiest in human history” to obtain. I don’t know what was more bizarre yesterday, Fox’s statement or that of Andrea Leadsom, who declared Jane Austen as “one of our greatest living authors”. Either way, it’s clear the Brexit negotiations have started as they mean to continue: with little progress, little concession and little warmth from either side.

While David Davis and his negotiation team tried to sell the UK’s vision on citizen’s rights and the Brexit bill, the EU’s position remains that they need more information and more clarity on what the UK actually intends to action when Brexit goes through. This will populate the front pages of newspapers for weeks and there’s a real danger currency markets will become bored and complacent just when they need to be listening.

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