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Please let on, Mario, the speculation is killing us

Please let on, Mario, the speculation is killing us

GBP
There were no significant UK data releases on Wednesday, although overall sentiment was slightly stronger amid expectations that the currency was undervalued from a longer-term perspective. In this context, there was scope for some Sterling relief unless a major breakdown in the Brexit negotiation process occurred.

There were expectations that the Bank of England would maintain interest rates at 0.25% at next week’s monetary policy meeting and the lack of yield support will limit the potential for Sterling gains.

The UK currency held above 1.3000 against the Dollar while GBPEUR was little changed close to 1.0940 ahead of Thursday’s European Central Bank (ECB) policy decision and Draghi’s press conference, with choppy trading likely later in the session.

USD

The US Dollar is marginally weaker today as traders seem to be sitting on their hands waiting and watching. The two major points of interest are the North Korea situation, which is driving risk aversion in financial markets, and the ECB interest rate announcement today as central bank actions are being closely watched by currency markets.

Statements by Congressional leaders yesterday indicated that President Trump and Congress have reached a preliminary deal to address the upcoming debt limit and budget deadlines. The proposed fiscal solution, which will include a continuing resolution to December 15th and suspend the debt limit to the same date, will be tied to recovery aid for Hurricane Harvey. Hurricane Harvey, despite the devastation it has caused, is unlikely to have a major effect on GDP but will affect some partial indicators. That being said, another major hurricane (Irma) appears set to make landfall in the US.

The Fed is set to start balance sheet ‘normalisation’ in September, but inflation needs to strengthen soon for another rate hike to occur this year.

Today’s American session offers the weekly jobless claims and IBD/TIPP Economic Optimism which could provide fresh impetus to the USD bulls, especially after yesterday’s solid rebound.

EUR

In the Eurozone yesterday, German production declined for July against expectations of a rebound. The weaker-than-expected orders have cast a shadow over the German growth projections for Q2, despite confidence data pointing towards a rebound with August numbers.

Eurozone interest rates and GDP will be released at midday but both are expected to be unchanged at 0.00% and 0.6% respectively. The main event today will be ECB President Draghi’s press conference, with the market focus on comments surrounding monetary policy. Leading up to this event there have been hopes that it would provide the platform for the Governing Council to unveil plans to reduce its €60 billion per month bond purchase programme.

From the beginning of the year, EURUSD has risen approximately 15% with around half of the appreciation coming since the end of June. This is a concern for the Governing Council as a firmer Euro weighs on exports, encourages imports, and hinders inflation. Forex and bond markets will remain watchful to tapering speculation which will likely see the ECB move tentatively going forward, especially as geopolitical risks have risen.

Data To Watch:
10:00am EUR Gross Domestic Product s.a. (QoQ)(YoY) (Q2),
12:45pm EUR ECB Deposit Rate Decision, ECB Interest Rate Decision,
1:30pm USD Continuing Jobless Claims (Aug 25), Initial Jobless Claims (Sep 1), Unit Labor Costs (Q2), Nonfarm Productivity (Q2), EUR ECB Monetary policy statement and press conference,
4:00pm USD EIA Crude Oil Stocks change (Aug 28),
12:00am USD Fed’s William Dudley speech

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