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Dollar starts the week with modest appreciation

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11 July 2017

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The main currency pair did not move much, hardly surprising considering the lack of any meaningful macroeconomic releases on either sides of the Atlantic and the fact that we are in the middle of a holiday season keeping traders off their desks.

he Dollar built modestly on last Friday’s gains, appreciating versus the Euro and trade-weighted basket of currencies during London trading hours, possibly as investors digested last Friday’s job report which overall seems to supports FED hikes, despite a lack of wage pressure in the US.

Today traders should focus their attention on the JOLTS report containing more nuanced information on the state of the US labour market, as well as communications from FOMC members and they should mostly overlook other second-tier publications from the US. In the afternoon there will be speeches from Lael Brainard and Neel Kashkari – the latter is FOMC’s only dissenter of higher interest rates, and voted to keep them unchanged both in June and in March.

Sterling stable as investors await next episode of BoE’s internal battle

Sterling kept its ground against the Euro on Monday, bouncing back and forth in a relatively narrow channel. British currency depreciated slightly against the US Dollar but it was all driven by relative strength in the Greenback.

With no significant releases from UK’s economy, investors will shift their attention to communication from the Bank of England. Considering recent disagreement in the Board on the topic of rate hikes, Sterling could be very volatile during and after communications from BoE’s Chief Economist and newly-turned hawk Andrew Haldane and his colleague Benjamin Broadbent, who will be speaking at 11:00 and 12:00 UK time respectively. With UK’s inflation nearing 3%, MPC members are feeling the pressure to take action. Even the most dovish economists are gauging the possibility of higher interest rates. Markets are also increasingly pricing in the possibility of rate hikes in the UK, but they still seem not fully convinced.

Current probability of tighter monetary policy in the UK before year-end stands at around 50%, still too low in our view. Considering the current composition of the MPC, it is possible that we will see a rate hike as soon as September. Divergence between what the market is thinking and what the central bank is communicating has become a key theme for most major currencies. All else equal, in case of the United Kingdom this situation might lead to the short to mid-term appreciation of Sterling if the Bank of England can convince markets that it means business.

Investors still have faith in the Eurozone economy

July’s Investor Confidence print from Sentix shows that investors are still optimistic about European economic environment. July’s index was just shy of last month’s number at 28.3, near 10-year record highs.

Absent important macroeconomic news investors might want to look for hints in ECB’s Benoit Coeure speech at 1 p.m., but it seems the communication from BoE & FOMC members will be more important this week.