Will central banks ratchet up verbal intervention

August 18, 2017 09:08 AM

Central banks around the globe have been increasingly vocal this year, with their trend of repeated verbal interventions sending foreign exchange markets on a wild roller-coaster ride.

The era of cheap money is coming to a timely end, with central banks now on a quest to raise rates at a pace that supports both growth and inflation. Markets will be closely watching the Jackson Hole Symposium on the 24th-26th August, which could provide a joint opportunity for financial heavyweights to signal policy shifts. Although there have been reports that European Central Bank President Draghi, will not deliver a new policy message at the conference, there is still a possibility that he will talk down the resurgent Euro. With July’s ECB meeting minutes revealing concerns over the strengthening euro, complicating the European Central Bank’s efforts to hit the 2% inflation target, Draghi may verbally intervene at Jackson Hole to weaken the currency.

Other heavyweights such as Janet Yellen and Mark Carney, will also be on the scene with market players, closely scrutinizing any comments made regarding monetary policy. With concerns over stubbornly low inflation and political drama in Washington, weighing on the prospects of higher U.S. interest rates, Yellen may avoid discussions on policy shifts altogether. The unsavory combination of Brexit uncertainty and soft economic fundamentals in the UK continues to weigh on the prospects of higher UK rates and this may be reflected in Mark Carney’s rhetoric at the pending Jackson Hole.

Will EUR/GBP hit parity?
There is growing speculation that the euro/British Pound (EUR/GBP) currency pair is on a positive trajectory towards parity in the longer-term and this is understandable when considering how the pair has appreciated over 800 pips from the 0.8300 support. The improving macro-fundamentals from Europe, continue to support the euro, while Brexit uncertainty has pressured the Sterling. With the expectations of the ECB QE tapering—fueling the bullish sentiment towards the EUR/GBP, further upside is on the cards.

From a technical standpoint, the EUR/GBP is heavily bullish on the daily charts, as there have been consistently higher highs and higher lows. Bulls remain in control above the 0.9000 higher low, with a breakout above 0.9150 encouraging a further increase towards 0.9300. A monthly close above 0.9300 should open a path higher towards 0.9600.

About the Author

Lukman Otunuga is an FXTM research analyst