Euro down as investors await European Central Bank meeting

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7 December 2016

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Euro slipped from its three week high against the US Dollar on Tuesday as investors firmly turned their attention to tomorrow’s highly anticipated European Central Bank meeting.

P
resident of the ECB Mario Draghi is widely expected to announce an extension in the central bank’s quantitative easing programme on Thursday, the outcome of which we believe could help push the Euro towards parity with the US Dollar for the first time since 2002.

Sentiment towards the single currency was dampened somewhat yesterday by comments from Italy’s interior minister who suggested that a general election in the country was likely as soon as February – although we think it is still too early to call. It remains to be seen when or if Prime Minister Matteo Renzi will formally resign, after appearing to temporarily backtrack on his pledge on Monday afternoon.

Sterling also fell from its two month high versus the US Dollar, although was fairly range bound until late afternoon in a day of limited economic announcements out of the UK. The EU’s chief negotiator Michel Barnier told reporters on Tuesday that the UK would have to reach a Brexit deal by October 2018 and could not “cherry pick” on issues such as access to the single market.

Meanwhile, the best performing currency in the world was by far and away the Turkish Lira, a currency that has been one of the worst affected by the election of Donald Trump last month. The Lira recovered over 2% of its losses yesterday after the governor of Turkey’s central bank delivered a fairly upbeat assessment of the Turkish economy, claiming that economic activity would pick up pace in the final quarter of 2016.

The Australian Dollar weakened after the Reserve Bank of Australia kept its interest rate unchanged yesterday while warning on near term growth prospects in the country.

Major currencies in detail

GBP

The Pound fell 0.6% against the US Dollar yesterday, with the lack of news out of the Supreme Court hearing keeping the currency range bound for most of the day.

However, with the Pound still trading around its highest level since early October, investors clearly remain confident that the UK government will lose its appeal to the Supreme on plans to trigger Article 50 without parliamentary approval.

Manufacturing and industrial production numbers this morning could take on some importance. Investors will have one eye on next week’s Bank of England meeting. The latest poll of economists compiled by Reuters yesterday suggested that the BoE will likely leave its monetary policy unchanged until at least 2019. We certainly don’t expect any significant announcements from the BoE at next week’s meeting.

EUR

The Euro dipped 0.4% yesterday after Monday’s sharp rally that confounded the majority of both traders and analysts.

Revised GDP numbers released yesterday painted a more upbeat picture of the Eurozone economy. The Eurozone economy grew 1.7% in the three months to September, compared with the 1.6% initial estimate. On a quarterly basis, the economy grew 0.3%, due largely to an increase in consumer spending and a modest increase in both exports and investment. However, given the time lag in the data, investors paid little attention to the announcement.

French trade and German industrial production data this morning is unlikely to rock the boat. The main event in the currency markets this week will instead be tomorrow’s European Central Bank meeting.

USD

The US Dollar was barely moved yesterday, with most major currencies trading within a fairly narrow range. The US Dollar index ended 0.4% higher.

Data released yesterday showed that the trade deficit in the US ballooned even further in October. The deficit increased to around $42 billion from a revised $36 billion, its largest in four months. This was primarily due to a significant increase in the goods deficit.

Elsewhere, factory orders smashed expectations, positing its largest increase in a year-and-a-half. Orders jumped 2.7% in October, led by a sharp increase in demand for aircraft orders.

With no major economic releases in the US today, the US Dollar will likely be driven by technical factors and events elsewhere.

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