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Euro weakens as Mario Draghi announces QE taper plans.

By Hamish Muress

Despite the majority of the market looking elsewhere yesterday (towards the ECB), Brexit, Theresa May and rebel Tory MPs couldn’t remain out of the spotlight. Dominic Grieve (chief rebel), announced yesterday that the language of the amendment that he and his colleagues has backed on Tuesday night had been changed and he had been duped. Whilst there are suggestions of some underhand tactics from the government towards the Remain Tory MPs it is another step forward for Theresa May and the flexibility afforded the government decreases the chance of a no deal Brexit scenario.

The pound heads into the weekend on the back foot against the dollar whilst hitting 10 day highs against the euro. Looking towards next week there is the latest Bank of England meeting and statement, however unlike the ECB and Fed, this will not be a ‘live’ meeting little is expected. Domestic Brexit updates are becoming more and more frequent over the last few weeks and expect next week to be the same.

The USD hit a 2018 high yesterday against the euro yesterday whilst also trading at levels only seen once this year against the pound. These moves were driven by US retail sales figures which doubled expectations and as a result the dollar surged. US consumption contributes 2/3rds of the country’s GDP so when it’s consumers are out on the streets (or online) spending then its creates an opportunity for the Fed and the banks to revise their GDP forecasts up.

Donald Trump’s week isn’t over yet however and he is set to announce the full list of Chinese products to be hit by his tariffs. The key question will be whether his bark is worse than his bite once again.

The ECB was at the center of the FX markets yesterday however the central currency endured a torrid day as it suffered heavy losses against both the pound and USD. Indeed EUR/USD returned to levels more familiar of October 2017 and the euro is set for its worst weekly loss in 19 months. Whilst the market had entirely expected Mario Draghi to announce a taper to the central banks quantitative easing package both the taper and outlook from Draghi was dovish. In many regards the reaction from the market and the selloff in the euro seems excessive given that Draghi was adopting his normal conservative and reserved manner. Whilst we may have to wait until the end of 2019 for the ECB to finally raise interest rates there remains support on EUR/USD around the 1.15 (IB) handle for the euro to hold on to in the meantime.

The Australian dollar rode the events of the ECB and Fed this week and also shrugged off a disappointing employment figure. Whilst the headline unemployment figure beat expectations the unreliable employment figures were highlighted once again as the figures fell short for the third time in the last four months.

The Canadian dollar suffered the same fate as many other currencies yesterday as it came under significant pressure for the dollar surge. The loonie lost over 0.9% and not even the higher oil prices could lift the currency. Looking towards next week the Canadian dollar will have to wait until Friday for the latest thorough insight into the economy as inflation and retail sales figures are released. Unlike their American neighbours, Canada has not been rushing to the shops recently and since the start of the year expectations have only been beaten once.

Business NZ PMI, which is considered to be a good indicator of the health of the New Zealand economy came out this morning showing considerable expansion in the manufacturing sector, even if there was a slight drop from April.

The New Zealand dollar can’t catch much luck either way against the pound in the last few weeks and since the start of the month it has failed to break through GBP/NZD 1.89 four times.