Macron set for victory
The euro reached its highest level in six months yesterday as traders accepted that Emmanuel Macron will become French President on Sunday.
The stubborn 1.0940 area has finally been broken and an assault on 1.1000 looks likely. Next week’s economic data from Germany could be the catalyst for a tightening of monetary policy at the ECB meeting on June 8th.
The pound also made gains against a weaker dollar with early results in the local elections pointing to an even stronger performance from the Conservative Party on June 8th than had previously been expected.
Support for UKIP, the party which forced David Cameron into the Brexit referendum, is looking spent. Internal wrangling followed by a crisis of identity has driven it to the margins.
Sterling lost a little ground to the euro with the single currency breaking the 0.8500 level.
Falling oil price pushes dollar lower
The United States is a major oil producer - a status which can only become more entrenched as President Trump encourages offshore exploration. OPEC’s failure to agree production cuts has led to a glut of oil.
Brent Crude, the international benchmark has fallen 2.8% overnight following a break of the $50 level yesterday.
The dollar suffered as the index dropped back from a test of the 100 level.
The fickle nature of the market is clearly demonstrated following a more hawkish than expected FOMC statement led to the concept of two further rate hikes in 2017.
UK facing inflation report and rate decision
It always used to be said that the Fed would never consider hiking rates immediately before an election for fear of influencing the vote.
It is unlikely that there will be a rate hike in the UK at the last MPC meeting before the election but Thursday's meeting will attract close attention. The meeting will coincide with the release of the quarterly inflation report.
One of the most significant parts of the report will be how the Bank of England views the nascent recovery of sterling so far in 2017. The effect of any increase will start to feed through into lower inflation later in the year.
Bank of England Governor Mark Carney sees inflation peaking at 2.7%/2.8% later in the year with market predictions a little more pessimistic at 3%/3.2%. Any further progress for the pound could see Mr. Carney proving his credentials yet again.
There is little doubt that sterling faces severe headwinds from Brexit over the next eighteen months but how a “no deal” scenario would play out remains to be seen. It is my opinion than were the UK and EU be unable to reach an agreement on the major areas of Brexit, in particular the price the UK should pay, that it would be equally damaging for the single currency. Furthermore, any intransigence from Tusk, Juncker and Barnier could lead further exit referenda as Brussels moves further away from much needed reform.
Employment data to set the short-term tone
Today sees the release of the employment report in the US. As is usual the headline number of jobs created will attract most attention. However, since last month’s headline was so far removed from the average of the past twelve months (98k vs.182k) any revision will be keenly awaited.
Should there be no significant revision and today’s release be similar the dollar could fall as dealers push back expectation for a rate hike in June. It is likely however, that the FOMC will have had advance guidance of today’s release so their relatively hawkish stance could mean a near to or higher than trend number.