Draghi wants weak Euro? Lets' do it

2017년 8월 17일

The verbal intervention of San Francisco FRB head John Williams has offset dovish July Fed Minutes, underpinning dollar growth. The dollar went on the offensive after the policymaker’s statement that the Fed is halfway to normalizing rates and additional stimulus should be gradually "taken out of the game." This is the second positive assessment of the economic situation in the US from representatives of the Fed, but the division of regulator members into two camps allows for lingering uncertainty while shaping clear forward guidance for markets. It should be noted that Williams does not have the right to vote in FOMC, so he allows himself to make more open statements about how the regulator should act.

The Fed's report, published on Wednesday, once again underscored the regulator's concern over the slowdown in inflation in the second quarter. However, this became clear already in the Fed meeting in June, so there were little clues to induce action. A relatively tepid assessment of the protocol reflects strengthening of the dollar and upswing in yields of US fixed-income market on Thursday. It is obvious that the focus shifts to the rhetoric of the Fed policymakers and the next trigger for the changes will be Janet Yellen's speech at the annual symposium of the Fed in Jackson Hole.

In Euro trading, investors, who made their bet on ECB tightening are putting up great resistance. However, in vain. The recent weakening of the dollar in the medium-term and the positive assessment of Mario Draghi's recovery of the euro area allowed EURUSD to strengthen significantly, but there were no clear signals on the transition to tightening from the ECB. Even on the contrary, Draghi tried to dissuade them to buy the euro, especially after a statement at the last meeting that restrictive measures has not been included in the topics for discussion. Data on inflation in the euro area showed that in July, the aggregate price gains remained at the level of 1.3%, tallying with the forecasts.

Correction for the pair has already overcome the 1.17 mark and is actively looking for catalysts for its development. One of them was the protocol of the June meeting of the ECB. As noted in yesterday's analytical note, the interests of the ECB clearly does not include a strong currency, what was confirmed today. The protocol says that "although it was noted that strengthening of the euro today reflects a fundamental change in relation to the rest of the world, there are risks that the rate may overshoot in future." The protocol also included a favorite wording about the need for "incremental" changes while conducting the policy, since the discrepancy in what was "promised" to the public with what the economy requires can be very painful to put up together. "In other words, the ECB calls on investors to correct their optimism, and correction of the exchange rate, which is actually happening now. In this light, Draghi's reluctance to comment on the timing of quitting QE in Jackson Hole looks quite logical.

Pound sterling accelerated decline after the release of data on retail sales, which showed a significant curtailment of consumer spending by the British. Positive dynamics showed only food products, otherwise residents of Foggy Albion turned to saving greatly. As can be seen the decline in purchasing power due to the "discord" of inflation and wages has made itself felt. The forecasts that such a dynamic will characterize the consumer even in 2018 severely undermines the Bank of England's chances of raising rates and can create a savings problem: by increasing the share of savings in disposable income, consumers will fall prey to their own consumer sentiment, slowing down further economic growth. The disappointment of investors was reflected in the growth of short positions on the pound, GBPUSD fell to 1.2860, forming a corridor for further decline.

Arthur Idiatulin, Tickmill Market Watcher