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Sintra-lating comments from Draghi

Sintra-lating comments from Draghi

EUR  
The single currency rallied across the board on Tuesday after European Central Bank (ECB) President Mario Draghi made surprise ‘re-flationary’ comments and hinted the central bank might begin to reduce its stimulus.

The Euro climbed the most in a year when ECB’s Draghi explained yesterday that all the signs now point to a strengthening and broadening recovery in the Euro area. Deflationary forces have been replaced by reflationary ones and we see growth above the general trend and well distributed across Europe. Inflation dynamics however remain muted than expected with a considerable degree of monetary accommodation still needed for inflation to become durable and self-sustaining. Draghi explained that these will need to be gradual when adjusting policy criteria.

Focus now remains on the Eurozone money supply data. Sentiment dwells on the European markets for further momentum on prices, as investors gear up for another heavy day of central bankers’ speeches (including speeches by the President Draghi for the second day in a row) at the ECB Sintra Conference.

GBP

Sterling rose versus the Dollar but fell against the Euro yesterday as contrasting fortunes strained the major currencies.

Bank of England’s (BOE’s) Mark Carney explained that he sees potential risks to financial stability associated with the range of possible Brexit outcomes; irrespective of UK’s future relation with EU. He announced that the UK will require a level of resilience, at least as great as currently planned and exceeds international minimum standards. The election result was interpreted to not have changed BOE contingency planning for Brexit.

Theresa May will wake this morning to the awkward prospect of today’s Prime Minister’s Questions in the House of Commons. This will be the first of the new Parliament and she is sure to get a rough ride. The opposition Labour Party have already tabled an awkward amendment to the Bill on the Queen’s Speech so she is aware of the probable scenario. Public spending cuts are now the number one topic facing the Government domestically. This is the battle ground chosen by the opposition since it is aware of the Government’s weak position.

This morning, the only release of the day, Nationwide UK House prices rose more than expected, but without market impact. So, Sterling trading will be driven by global factors (Euro strength) and by political/Brexit headlines.

USD

The US Dollar Index, which gauges the Buck versus its main rivals, remains on the defensive this week and is now struggling around the 96.00 level, hitting fresh yearly lows. The index came down to test the area around 95.90 yesterday, a figure last seen in the wake of Trump’s win back in November 2016. The fall was backed by a strong selling bias sparked after hawkish comments by Draghi in Europe which caught markets off guard yesterday.

Also weighing on the sentiment around the Buck is uncertainty around the American Health Care Act bill (or ‘Trumpcare’) which remains an issue as Republicans still stay pretty divided on the subject.

USD stayed pretty unresponsive after yesterday’s innocuous comments by Chief J.Yellen, who argued that the likelihood of another crisis is close to zero, as the American banking system is now stronger. Furthermore, she inferred that the reduction of the Fed’s balance sheet will be ‘gradual and predictable’.

Data wise in the US today, the pending home sales for May are due along with the EIA’s weekly report on US crude oil inventories, although much of the attention should be on speeches by central bankers including Yellen at the ECB Forum in Portugal.

Data To Watch:

02:30pm GBP BOE’s Governor Carney’s Speech, EURO ECB President Draghi’s Speech.
03:00pm USD Pending Home Sales (MoM)21
(YoY) (May)

 

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