Pound Sterling Sell-Off Eases, US Dollar Still in Demand, Euro Undermined by Schaeuble Comments

Latest views, news and forecasts, for the three key currencies we follow - the euro, US dollar and British Pound.

The US dollar has hit 16 month highs this week with USD/JPY hitting levels not seen since 2008. There were no specific fundamental triggers to push the greenback higher, rather entrenched momentum continues to play out.

"Rather its strength stemmed from the weakness of the other majors with EUR/USD especially plumbing fresh yearly lows at 1.2858," says Boris Schlossberg at BK Asset Management. The uncertainty facing the pound sterling is also helping push the GBP/USD lower.

• The British pound to euro exchange rate (GBP/EUR) is 0.10 pct in the blue. 1 GBP to EUR conversion = 1.2563 .
• The pound to US dollar exchange rate (GBP/USD) is 0.07 pct higher on a day-on-day basis. 1 GBP to USD conversion = 1.6222.
• The pound to Australian dollar rate (GBP/AUD) is 0.04 pct lower. 1 GBP to AUD conversion = 1.7703.
• The pound to Canadian dollar exchange rate (GBP/CAD) is 0.06 pct lower. 1 GBP to CAD conversion = 1.7682.

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The Dollar Rate Today: USD Stays In Demand

The dollar has been strengthening and is likely to continue to do so.

Last week, the dollar rallied to a 14-month high against the euro and a nine-month high versus the yen.

Overall, a broad measure of the dollar has climbed over 5% from the June lows.

"The strength in the dollar is not simply a function of an accelerating U.S. economy; it also reflects weakness in other regions. For example, European economic data continue to disappoint, which has forced the European Central Bank to further lower interest rates and initiate a new program to buy asset-backed securities, a program dubbed “private QE.” The effect, as expected, was to push the euro down against other currencies, especially the dollar," says Russ Koesterich, BlackRock’s Global Chief Investment Strategist.

The rally in the dollar is also pushing down commodity prices across the board.

The S&P GSCI Total Return Index for commodities is down nearly 3% year-to-date, with bigger losses in Brent crude Oil, natural gas, and almost all of the agricultural complex.

"Even gold, which has benefited this year from the drop in real interest rates – has lost around 5% from its July high, including another 1.50% last week. To the extent that the dollar continues to rise, particularly if real rates start to reverse and move higher, investors should expect commodities to remain under pressure," says Koesterich.

The pound sterling: No let-up for under-pressure GBP

Economic data has been relegated to the sidelines by negative market sentiment towards GBP surrounding the upcoming Scottish referendum.

"GBP will likely remain sensitive to headlines and any new opinion polls on the Scottish referendum; we see risks that GBP may continue to struggle as the referendum approaches," say Lloyds Bank Research.

Schlossberg notes that there is some support to be had - as fletting as it may prove to be:

"Cable found a modicum of support at the 1.6100 level after taking a massive drubbing yesterday. Some analysts continue to predict a doomsday scenario for the currency if Scotland votes Yes with Nomura suggesting that the unit could fall by as much as 15%. We remain skeptical of such a scenario, unless the Scottish vote unleashes broad based movement for fracture across the whole Eurozone."

Volatility in pound options has risen to its highest level since 2011 and is likely to remain elevated until the vote of September 18th.
"The pair remains vulnerable to further selloffs especially if the Yes vote pick up more momentum over the next few days, but as we mentioned yesterday if the political risk evaporates sterling could see a very sharp short covering relief rally," says Schlossberg.

The Euro Rate Today: Is the German Economy on the Wane?

The EUR/USD was hampered by comments from German Finance minister Schaeuble who noted that German economic outlook has clouded over.

Schaeuble stressed that the other EU members stability oriented policies and maintain balanced budgets.

"It is clear that Germans will continue to resist any dramatic policy initiatives at stimulus in the EZ, but the situation in the region continues to deteriorate with many member nations on the cusp of recession. As of now the biggest stimulative effect comes from the declining currency which should help boost export demand over the next several months," says Schlossberg.

Nevertheless, the potential for further major declines in the shared currency look limited at present. Lloyds Bank Research tell us:

"Sentiment towards the EUR remains weak, and while we view underlying bias is likely to remain on the downside for EUR over the short/medium-term, net EUR short positions are already at extended levels. So in the absence of fresh EUR negative news it's difficult to see EUR short positions extend further."