After the last few weeks, we finally begin the week relieved, that there has been no further testing or significant developments in North Korea. However, we are digesting the severe impact of Hurricane Irma in the US. As we are seeing severe damage and over 5 million people still without power, it is fair to estimate the damage to housing and industry will be hugely significant. The impact of the hurricane was not, in fact, as strong as was being predicted last week So bearing in mind both of these factors, towards the tail end of last week we saw a significant surge towards “Risk” assets with USD/JPY hitting lows of 107.40 and Gold 1360 against the US Dollar with fear of further North Korean action and the predicted devastating weather. Naturally, as the markets opened last night, taking into account, the North Korea fear didn’t come to fruition and the storm was moderately milder than expectation, we saw these trades reverse with a significant gap at the open.
On the whole, it was a very poor week for the US Dollar, as the market absorbed the damage from Hurricane Harvey and the impending Hurricane Irma. With the required aid packages needed to assist those affected by the storms, President Trump had to FastTrack a policy through the house and finally struck an agreement with the Democrats – something he hadn’t achieved to date. Whilst there was a glint of optimism, we could see the Tax reform bill expedited after the house kicked the can on the budget deficit. With the additional cost of the storms and the rising tensions in North Korea (not to mention the investigation into the Presidents financial affairs), it is now being deemed likely that we may not see any further action from the US Federal Reserve (The Central Bank and rate setting committee) until 2018, against expectation of December 2017.
In the UK, we have a big week of data with the highlight being the Bank of England Monetary Policy meeting on Thursday at midday. Before we receive this, we have year on year CPI inflation data on Tuesday (consensus expectation is 2.8% versus 2.6% last month) as well as RPI and PPI at the same time. On Wednesday, we receive the UK Average Earnings data (consensus is that we see a 0.2% increase from 2.1% to 2.3%). The correlation between these figures is incredibly important, as naturally when goods and services increase in cost if the earnings of the public do not match that pace, the deficit naturally causes strain on households and businesses alike. This is, of course, a key factor in the decision-making policy for the BOE Monetary Policy Committee (MPC). Inflation currently sits well above the target 2pct benchmark, making it very hard for the MPC to hike rates at this time. The expectation is that the 9 MPC members will vote 7-2 in favor of leaving rates on hold this week.
In the Eurozone, we had Mario Draghi’s European Central Bank meeting last Thursday. They chose to leave Quantitative Easing in place and the “Tapering” or unwinding that had earlier been discussed, was put on hold. The reasons sighted, being again inflation and the strength of the Euro, with it trading at highs against both the US Dollar and Sterling. Draghi did speak with a positive assessment of the economic outlook, he stated that the level of the currency was accommodative, naturally, the market is taking him at his word and subsequently, we have created a new high in EUR/USD.
Have a great week
Written by CEO, Duncan Donald.