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Euro Rallies As Some ECB Members See Q4 2019 Rate Hike As Too Late.

By Alex Edwards

The pound got a further boost yesterday following the release of better than expected Services PMI data, which came in at 55.1 vs. forecasts for a reading of 54.0, an 8-month high. It indicates that the economy likely grew by 0.4% in the second quarter, up from 0.2% in the opening quarter of 2018 and so it has increased market expectations for an August rate hike.

Cable continued to climb higher throughout the day yesterday, benefiting from improving risk sentiment. Traders will now be looking to Theresa May’s outline for a new Brexit plan later on in the week. In fact, Downing Street has already set out some of the details on how customs could be handled - it could allow the UK the freedom to set its own tariffs as well as using tech to determine whether UK or EU tariffs should be applied to any good.

Mark Carney is due to speak later this morning, although it’s uncertain whether he’ll reference monetary policy. Market moving, or moreover GBP/USD moving data is due out this afternoon from across the pond by way of US ADP Non-Farm Employment, ISM Non-Manufacturing PMI and FOMC Meeting Minutes.

The dollar remains on the back foot this morning as risk appetite remains fairly positive, at least more positive than it has in the recent past. News overnight that the US ambassador to Germany has told car manufacturers that the US government was prepared to find a compromise on tariffs helped to support this improved risk sentiment.

It was a public holiday in the US yesterday and so we didn’t see any data released. It’s a different story today, however, with a whole host of major economic data prints due, as noted above. The ADP jobs report is a forerunner to tomorrow’s more important non-farm payrolls, but is still an important release in itself. Investors will be particularly interested to see whether the recent trade tit for tat has had any impact on the US economy. Similarly, it will be interesting to hear if the ongoing trade spat is referenced in the FOMC Meeting Minutes later this evening and to know if the Fed are concerned for any potential or actual impact on the US economy.

EUR/USD was steady throughout the day for most of yesterday’s session. It pushed mildly higher on the back of improving risk appetite, and, following the biggest market moving news of the last 24 hours, it has snapped higher this morning. A Bloomberg report yesterday cited some ECB members as saying that they saw a rate hike in Oct-Dec 2019 as being too late, and with that rate hike expectations for Sept 19 hike quickly increased to approx. 80%. EUR/USD has tipped through the 1.17 figure already this morning as European traders more widely react to the news and it’s holding fairly firm for now.

US economic data and the usual trade/Brexit headlines will likely determine short term direction in EUR/USD today amid a lack of any major EU data releases.

In what was a quiet night for markets overnight due to the national holiday in the US, the Aussie opens lower this morning against its US counterpart and AUD/USD trades just shy of the .74 figure currently.

Resilience in commodity prices have been largely AUD supportive and have served to limit downside moves in the short term. With global trade tensions expected to remain in focus, risks for the AUD are certainly skewed to the downside ahead of key risk events including US non-farm payroll numbers and the FOMC’s June policy meeting minutes.

Oil held near a 3 year high, affected by tighter than expected supply, supporting the CAD on a rather slow session Yesterday. USD/CAD managed to stay in the 1.31/1.32 range and opens flat this morning at 1.3145. The probability for a rate hike at the next July 11th BOC meeting stayed above 80% and we will be getting some employment and trade numbers on Friday, which will no doubt further shape these rate hike expectations.

The New Zealand dollar edged marginally higher through trade overnight and Wednesday. It’s tracked other commodity currencies higher and has benefited from the improving risk landscape. There was no local data released overnight and there’s none due this evening, either.