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Cautious Draghi Dampens Optimism

ECB President prefers vigilance.

 

It is entirely predictable in an institution like the E.U. where everything moves at a snail’s pace that the trajectory of interest rates should come under the same soporific influence.

 

A speech by Mario Draghi, the ECB President, to the Dutch Parliament yesterday was expected to herald a new dawn where the ECB moved to a neutral bias on the economy. We were then all supposed to believe that a move to a tightening bias accompanied by the removal of extraordinary measures would come later in the year.

 

The reality was, sadly, a little different. In a grey suit which matched his expression perfectly, Sr. Draghi counselled for caution.

 

He said that it is too early for the ECB to declare victory in its quest to boost inflation despite signs the bloc’s economic recovery is strengthening.  He is in no rush to raise interest rates or wind down the ECB’s 60 billion a month euro bond-buying programme. Music to the ears of Greeks, Cypriots and other struggling E.U. members but a cold shower of disappointment for Frankfurt.

 

The Euro continued to trade lower driven by profit taking following Macron’s French election victory.  It is now well below the 1.1000 level against the dollar and testing support at 0.8400 against the pound.

 

Inflation outlook to drive Sterling

 

Today sees the release of the Bank of England’s Quarterly Inflation Report.

 

This is the singular most forward-looking piece of research produced by any Central Bank globally. It provides clear advance guidance to the gameplan that the Bank will adopt, providing the market with solid evidence of the influences and concerns being monitored.

 

The Monetary Policy Committee also meets today with no change to official rates expected. A lively debate is likely over the degree of influence on inflation from the stronger pound. Concern over a drop towards parity against both the dollar and Euro have evaporated completely.

 

Admittedly, Sterling is being driven by political rather than economic influences but beggars can’t be choosers!

 

Mark Carney, the Governor, has been constant in his lack of concern (in public) regarding inflation and he will be relieved that the pound now has a much more solid foundation. The economic effect of Brexit is yet to be seen. The influences from scaremongering remainers need to be disseminated from fact and any mention in the inflation report will be well received for the clarity it will bring.

 

Trump’ Motives Questioned

 

We will never know why Donald Trump sacked FBI Director James Comey.

 

Trump’s detractors will, of course, point to a cover up and that Comey was getting too close to uncovering Russian meddling in the election. The truth, as ever, will lay somewhere between the Russians and the Clinton emails. If nothing else, Trumps actions are expedient. In typical fashion, he saw an opportunity and went for it.

 

The fallout from what will be seen as a domestic matter has had negligible effect of the dollar. The index rose close to 99.75 yesterday. Given the continued widening of interest rate differentials, a move above 100, last seen in mid-April is likely. The Euro has corrected lower but sterling remains well supported as evidenced by the fall in the EUR/GBP rate to close to 0.8400.

 

The New Zealand dollar, a currency driven to some extent by global risk appetite has been traditionally supported by a high interest rate.

 

This driver has, to some extent, disappeared following the financial crisis and looks set to remain absent. Today’s meeting of the RBNZ pushed a rate hike further into the future. In similar fashion to the RBA, the RBNZ had stated that interest rates had bottomed but any commencement of tightening is some way off.

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