Currencies: Euro hits 3-year high; sterling at highest since Brexit

The euro surged against rivals on Friday, hitting a three-year high against the dollar after German lawmakers reached an agreement on a blueprint for a ruling coalition between Chancellor Angela Merkel’s Christian Democrats and the opposing Social Democrats.

Also in Europe, the British pound moved to its highest level since the U.K.’s vote to leave the European Union on the back of reports suggesting the Netherlands and Spain want to work toward a “soft” Brexit.

The U.S. dollar meanwhile held losses it incurred on the back of euro strength, even as data showed that core inflation rose slightly more-than-expected in December.

What are currencies doing?

The ICE U.S. Dollar Index DXY, -1.08% which measures the buck against a basket of six rivals, was down 1% to 90.393. On the week, the index is looking at a 1.1% decline, its fourth in a row, and biggest in two weeks.

Meanwhile, the WSJ Dollar Index BUXX, -0.77% which gauges the greenback against 16 currencies, dropped 0.7% to 84.78 on Friday, and fell 1.1% on the week.

The euro EURUSD, +1.3795%  shot up by more than 1% to $1.2195 from $1.2034 late Thursday in New York. The euro hasn’t traded that high against the dollar since late December 2014. On the week, the shared currency gained 1.4%.

The British pound GBPUSD, +1.3886% reached its highest level since the U.K.’s vote to leave the EU on Friday at $1.3744. Sterling last bought $1.3733, up from $1.3539 on Thursday. It gained 1.2% since last week.

Against the Japanese yen USDJPY, -0.20% the U.S. currency bought ¥111.00 compared with ¥111.26 on Thursday. Overall, the dollar dipped 1.8% against the yen this week.

Elsewhere in emerging markets, the Brazilian real USDBRL, -0.3048%  has been in focus, after S&P cut the country’s credit rating by one notch to BB- driven by its fiscal outlook. Brazil’s government is trying to push through a pensions reform package to sort out its public finances, but the vote on the legislation has been delayed until Feb. 18.

The real’s response has been volatile, initially falling against the dollar, then reversing into gains, and finally flipping back and forth between gains and losses. One dollar last bought 3.2063 real, down from 3.2154 real late Thursday. On the week, the dollar-real pair slipped 0.7% this week.

What’s driving the market?

The euro shot up midmorning during European trading hours after Chancellor Angela Merkel’s center-right CDU party reached an initial deal to form a coalition with Martin Schulz’s center-left SPD. Germany held elections last September in which incumbent Merkel managed to win but then subsequently struggled to secured a ruling coalition.

The euro was already higher when that news broke, extending gains from Thursday when the minutes from the European Central Bank’s December meeting revealed that policy makers were considering a hawkish shift toward monetary policy in 2018.

The dollar index was weaker on the back of that, although it attempted to claw back some of its losses in the aftermath of consumer-price index and retail-sales data, which painted a supportive picture. December core inflation rose 0.3%, compared with MarketWatch consensus forecast of 0.2%, while headline numbers were in line with estimates at 0.1%. On the year, inflation rose 1.8%, up modestly from 1.7% before.

Despite the sluggish dollar, market participants saw Friday’s data as another indicator that the Federal Reserve, which is planning to raise interest rates up to three times this year, could make its first move in March.

In relation to Britain’s exit from the European Union, the Spanish and Dutch finance ministers have reportedly agreed to support a soft Brexit, which helped sterling advance on Friday. A soft exit from the EU would keep the U.K. closer to its biggest trade partner.

What are strategists saying?

“There are two ways to look at the latest CPI figures,” said Jacob Deppe, head of trading at online platform Infinox. “The first is that core CPI is stubbornly below target and so monetary policy should be held until the Fed has a clearer picture of the state of the U.S. economy.”

“The second is to ignore the fact core CPI is below the Fed 2% target and argue it has held pretty steady, and close enough to target, not to halt further rate hikes,” Deppe added.

“The Fed should continue to tighten gradually given where the unemployment rate, equity markets, house prices, corporate debt levels and global growth indicators are at,” said Chris Probyn, State Street’s chief economist, in a call with MarketWatch on Thursday, adding that the central bank could still find itself in a situation where its hawkish agenda needs to be put on hold in the future.

Still, “inflation has been similar last year and the Fed hiked three times,” Probyn said.

“Our outlook for the dollar remains bearish in the short-term as it is clear that investors are skeptical over how bullish they will be in 2018 and until they get a better idea on what to expect, further defensive trading should be expected,” said Konstantinos Anthis, on the ADS Securities research team, in an email to clients.

What are the data?

Retail sales rose 0.4% in December, falling just short of the 0.5% MarketWatch consensus estimate. Excluding cars, sales also increased 0.4%, beating expectations of 0.3%.

Data for business inventories for November showed a 0.4% increase, up from a 0.1% decline in October.

Filed in: Top News Tags: 

You might like:

Snap Spectacles review: Nothing to see here Snap Spectacles review: Nothing to see here
Key Words: Steve Kerr expresses dismay with league management — not the NBA’s but the NFL’s Key Words: Steve Kerr expresses dismay with league management — not the NBA’s but the NFL’s
Irish voters flock to the polls for historic referendum on abortion, with exit polls favoring liberalization Irish voters flock to the polls for historic referendum on abortion, with exit polls favoring liberalization
Commodities Corner: Rising angst around global politics doesn’t move gold like it used to Commodities Corner: Rising angst around global politics doesn’t move gold like it used to
Qualcomm will gain more than its rivals do, as artificial intelligence grows at the ‘edge’ Qualcomm will gain more than its rivals do, as artificial intelligence grows at the ‘edge’
NewsWatch: 6 things NOT to buy at Memorial Day sales NewsWatch: 6 things NOT to buy at Memorial Day sales
Your Digital Self: The future of shopping will include body mapping, robot assistants and ‘just walk out’ stores Your Digital Self: The future of shopping will include body mapping, robot assistants and ‘just walk out’ stores
Market Snapshot: Dow, S&P 500 end lower as oil wallops energy sector, but tech shares buck the trend Market Snapshot: Dow, S&P 500 end lower as oil wallops energy sector, but tech shares buck the trend

Leave a Reply

Submit Comment
© 2018 Stock Investors News. All rights reserved. XHTML / CSS Valid.