ECB worried about currency strength, US labour report eyed

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1 September 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 Euro dipped against its major peers for the third straight session yesterday after the release of a report suggested that members of the European Central Bank were growing concerned about the recent rapid rise in the currency.

he common currency has had a remarkably impressive 2017 so far, appreciating by close to 15% for the year and briefly breaking above the physiological 1.20 level versus the US Dollar for the first time since January 2015. The ECB would no doubt be wary of this and the market appears to be preparing itself for Draghi to make some form of reference to the exchange rate during his press conference at next week’s Governing Council meeting.

Earlier in the day, the common currency received somewhat of a boost from an impressive set of inflation data. Headline inflation jumped unexpectedly to 1.5% year-on-year in August from 1.3%, its highest level since April. The core measure, which excludes volatile components of unprocessed food and energy and is watched closely by the ECB, also came in at an above forecast 1.4% from 1.3%. This seemingly sets the stage for the ECB to, at the very least, begin debating the future of their asset purchasing programme at its meeting next week.

Moreover, unemployment came in unchanged in July and is now also at its lowest level since February 2009, which should continue to filter its way through to foster stronger growth. It is clear that economic conditions in the Eurozone are improving and we expect President of the ECB Mario Draghi to acknowledge as much, regardless of whether a tapering in the QE programme is announced as many are expecting.

Nonfarm payrolls out today, quiet session for Sterling

A mostly impressive day of economic data helped lift the Dollar to a one week high yesterday, although it gave up much of its gains as London trading progressed. The Fed’s closely watched PCE inflation index was unchanged at 1.4%, although there were positive surprises in the latest personal income and jobless claims figures.

Risks to EUR/USD now rest firmly with this afternoon’s US labour report, including the all-important nonfarm payrolls number. Consensus is for another solid reading around the 180k mark. We think anything north of the 170-175,000 level would be more than enough to solidify our view that higher interest rates are warranted in the US this year, provided earnings and unemployment remain robust.

Sterling had another quiet day on Thursday. The UK currency ended London trading modestly lower against the Dollar, although much of the downward pressure on the Pound this week can be attributed to uncertainty over the outcome of the ongoing Brexit negotiations. This morning we had the latest manufacturing business activity PMI for August, which came in comfortably above consensus. The index rose to 56.9 from a revised 55.3, coming in line with the view that the UK economy is on course for a modest acceleration in the third quarter of the year.