Euro soars to June 2016 high after best day in a year

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The single currency had a very impressive day on Tuesday, spiking by well over one percent back towards the 1.14 level against the US Dollar for the first time since June last year (Figure 1).

nvestors have reacted in an overwhelmingly positive fashion to comments from European Central Bank President Mario Draghi on Monday evening. Despite claiming that inflationary pressures remained muted, Draghi indicated that the ECB’s policy may soon be moving from accommodative to neutral as the Eurozone economy continues to improve, although the process would be a gradual one.

Figure 1: EUR/USD (26/06/2017 – 28/06/2017)

With the outlook for the economy considerably improved, these comments suggest that the central bank may be making preparations to taper, or dial back, its existing quantitative easing programme. A more concrete announcement from the central bank at any of the next few meetings would be a significant development and one that would materially impact our view on long term EUR/USD weakness.

Yellen claims “safer” financial system, Harker talks up rate hikes

Yesterday we saw comments from Chair of the Federal Reserve Janet Yellen, although she failed to prevent the sharp drop off in the Dollar which slumped by around one percent against its major peers. Yellen disappointed some of the market by failing to reinforce her recent hawkish bias. She instead commented on financial stability by claiming that a repeat of the recent financial crisis would unlikely take place again in our lifetime.

Earlier in the day we also saw a set of relatively hawkish comments from fellow Federal Reserve member Patrick Harker. Harker claimed that the Fed was “on track”, and threw his support behind an additional interest rate hike in the US before the end of the year. He echoed recent communications from Janet Yellen which suggest that the recent bout of underwhelming inflation could prove temporary. However, he claimed it would take a bit longer for prices to rebound back towards the central bank 2% goal.

Scottish Referendum off the table, for now

Plans for a second referendum on Scottish Independence were put on hold yesterday by First Minister Nicola Sturgeon. In a fairly unsurprising announcement, Sturgeon announced a “reset” of her proposed timetable, with any plans for a proposed referendum to not take place until at least after the autumn of next year. Sterling received modest support for the day against the US Dollar, with Sturgeon’s announcement alleviating any lingering concerns that Scotland could plan another vote on independence during the highly uncertain Brexit process.

Governor of the Bank of England Mark Carney also spoke yesterday following the release of the central bank’s Financial Stability Report, although didn’t touch on monetary policy. Carney will be making a second appearance in consecutive days today at an ECB forum on central banking, which could prove a more significant market mover this afternoon.