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Euro sinks as Wall Street stabilises, BoE to hint at further hikes?

The Euro slumped by almost one percent during London trading on Wednesday after stock markets steadied and investors were left disappointed by the choice of Germany’s new finance minister.

Following a prolonged few months of negotiations, Angela Merkel’s CDU Party announced that it had finally reached an agreement to form a ‘grand coalition’ with the Social Democrats (SPD). Investors were, however, left disappointed by the announcement that current mayor of Hamburg and the perceived less market friendly, Olaf Scholz, would take up the position as finance minister. Earlier reports had hinted that SPD leader Martin Schulz, who it was suggested would have pumped more money into the German economy, would head up the finance ministry under the new government. The allure of the safe-haven currencies also faded yesterday as equity markets began to stabilise following a frantic couple of days of trading on Wall Street. The Dow Jones index rose back above the 25,000 mark yesterday, having fallen by over 6% at one stage on Monday evening as equity investors began the fret about the prospect of higher interest rates in the US. The mass unwinding of XIV shorts, an inverse of the VIX index and an instrument that allows investors to bet against a volatile market, exacerbated the move. But with stock markets relatively calm on Wednesday, the Dollar eked out gains against most major currencies.

Bank of England to meet for ‘Super Thursday’ today

Sterling lost around three-quarters of a percent against the broadly stronger US Dollar yesterday as investors eagerly awaited today’s Bank of England meeting for clues as to the possibility of another interest rate hike by the central bank in 2018. The Bank of England will be meeting for the first time so far this year this afternoon, announcing its latest interest rate decision and releasing fresh economic projections as part of its quarterly inflation report. Rates are certain to be left unchanged following November’s hike and we instead await the tone of communications from the minutes and inflation report that could indicate another hike is coming. Financial markets are currently placing around an 80% chance of a hike at the bank’s August meeting. A more hawkish tilt that includes upwardly revised growth and inflation forecasts or the highly unlikely scenario of a surprise hike vote on the MPC would be a significant positive for the UK currency today.



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