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Rocket man causes Gold surge

Rocket man causes Gold surge

GBP
Merkel’s difficult task of forming a German coalition weighed on the Euro yesterday, with levels above 1.1360 being tested by the Pound. Some hopes of greater progress in the latest round of Brexit talks in Brussels also helped underpin sentiment, although there were no substantive comments at the end of the first day of talks.

From a longer-term perspective, there were still important concerns surrounding splits over Brexit policy within both major parties and, incidentally, over who won the general election. Sterling was hampered to some extent by a dip in risk appetite and gilt yields also declined which eroded yield support, although gains in oil prices offered some support.

In the minutes before market open there was a fresh 10-week high above 1.1400 against the Euro, but a decline below 1.3500 against the Dollar.

USD

In the Dollar market yesterday, there were two speeches from the Fed’s FOMC members Charles Evans and William Dudley. The Dollar ended the day having strengthened in the afternoon against its major rivals as Cable closed at 1.3509 and, against the Euro, a much firmer gain was seen as it closed 1.1830.

FOMC Member Evans’ dovish comments centred on low inflation expectations for monetary policy and the economy; he believes they are not consistent with the Fed’s 2% goal. Clearer signs of higher inflation are needed before hiking rates again as he is not convinced that weak inflation is such a transitory event. Overall, Evans is confident the current policy approach is appropriate.

FOMC Member Dudley spoke overnight adding fuel to the fire for fresh hopes of interest rate hikes before the end of 2017. Dudley said that the Fed’s target of 2% inflation would be expected to be hit in the medium term and ‘the Federal Reserve will likely continue to remove monetary policy accommodation gradually’.

In Geo-Political news, North Korea’s Foreign Minister increased geopolitical tensions between the United States and North Korea. North Korean Foreign Minister Ri said ‘North Korea sincerely wishes the war of words with U.S. does not turn into real action; Trump’s comments over the weekend were clearly a declaration of war’.

EUR

Despite attempts to the contrary, the Euro was seen turning to the downside yesterday evening. Investors were further digesting the German elections outcome which turned out as expected, however, with the AfD making inroads into the Bundestag, the markets were very cautious. The rise of the populist and right-leaning political parties this year has been a major concern among the leaders in the EU.

Draghi also spoke yesterday and provided some insight into the Eurozone economy as a whole. He explained that the European Central Bank (ECB) will decide later this year on a re-calibration of instruments that maintains the degree of monetary support that the Euro area economy still needs. The ECB is becoming more confident that inflation will eventually head to levels in line with their aim, but also know that a very substantial degree of monetary accommodation is still needed for the upward inflation path to materialize. There will still be some uncertainties with respect to the medium-term inflation outlook, and recent volatility in the exchange rate represents a source of uncertainty which requires monitoring.

Today, we see ECB’s Praet speaking in “Good Pension Design” lecture at 2nd ECB Annual Research Conference in Frankfurt.

Data to Watch:
1:00pm EUR ECB’s Praet Speech
2:00pm USD S&P/Case-Shiller Home Price Indices (YoY) (Jul), USD FOMC Member Mester speech
3:00pm USD New Home Sales (MoM) (Aug), USD New Home Sales Change (MoM) (Aug)
3:30pm USD FOMC Member Brainard Speech
5:45pm USD Fed’s Yellen Speech

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