Pound, Euro Bested by Dollar and Yen as Risk-Off Drives Markets into the Weekend

-Sterling and Euro are flat against the US Dollar ahead of the weekend.

-All currencies are weaker against the safe haven Japanese Yen Friday.

-Small Dollars of Australia, New Zealand and Canada are down broadly.

-White House tariff threat and staffing key risks to markets over weekend.

© DragonImages, Adobe Stock

The Pound and Euro were a touch lower against the US Dollar during risk-off trading Friday as markets prepared for potential adverse news-flow over the weekend, as well as an action-packed week ahead. 

All currencies were weaker against the safe haven Japanese Yen and Swiss Franc, while the small Dollars of New Zealand, Canada and Australia were down broadly against their international rivals.

Most of the risks for markets ahead of and over the weekend are all emanating from Washington, with a lingering threat of further trade tariffs, as well as another possible staff shakeup at the White House, each serving to keep traders cautious.

"FX has adopted a risk-off tone heading into the weekend but other major asset classes have yet to follow suit. The day ahead is fairly quiet, however, in terms of scheduled data releases and event risks. This leaves us watching for the inevitable parade of politics," says Ned Rumpeltin, European head of FX strategy at TD Securities.

President Donald Trump was reported Tuesday to be considering another set of anti-dumping tariffs. This time on consumer goods from China, which many expect could draw a retaliation from the world's second largest economy.

The Euro and small Dollars of Canada, Australia and New Zealand are the developed market currencies most exposed to another volley of trade tariffs from the White House.

Both Australia and New Zealand have strong trade links with China while Canada is itself the target of so called protectionist actions by the White House.

This is while the White House already threatened to impose tariffs on cars imported from the European Union if it retaliates against President Trump's earlier steel and aluminium levies.   

"Dollar strength has been seen repeatedly throughout the week, and this afternoon has been no exception, with the greenback on the up against the euro, sterling and the Aussie," says Chris Beauchamp, chief market analyst at IG Group in London.

"Whether this dollar rally has much further to run remains to be seen, but a slightly more hawkish Fed next week could be enough to spark more short-covering."

Above: Pound Sterling peformance vs the G10 during the week ending Friday, 16 February.

In addition to possible trade measures, markets may well be cautious about the looming prospect of another shake up of President Trump's top team as speculation is awash that the President may be about to fire national security adviser Herbert McMaster.

"And on it goes. The new appointments in the White House continue. The next dismissal is due. This time round it is the turn of the National Security Advisor. For the FX market that means: watch out!," says Ulrich Leuchtmann, head of FX strategy at Commerzbank.

Markets were swift to offer the US Dollar lower on Tuesday when the White House announced that Secretary of State Rex Tillerson is being replaced with Central Intelligence Agency director Mike Pompeo.

The move prompted concerns about stability in the White House administration as well as fears of a pivot to a more hawkish and confrontational foreign policy. This lead one strategist to observe a “White House chaos premium” is being priced into the Dollar.

Friday's price action looks to be about traders ensuring they are not caught on the wrong side of either of these possible events, whether it be because tariffs or departures are announced over the weekend, or simply that speculation becomes more rampant. Although it isn't too dissimilar to that which has prevailed throughout much of the week. 

"Risk aversion and a slow recovery in oil prices in the second half of the week explain some of the big FX moves, though central bank policymakers' comments play a part too. JPY is the pick of the G10 currencies in a week when G10 bond yields fell by between 2bp (US) and 9bp (Canada) and equity markets were mostly weaker, " says Kit Juckes, chief foreign exchange strategist at Societe Generale.

"GBP was helped a bit by optimism about progress in Brexit talks, while at the other end of the spectrum, NZD, AUD and CAD all fell against USD, EUR and JPY, which rather reflects how the market feels about high-beta currencies in general."

The Pound-to-Dollar rate was quoted 0.07% higher at 1.3932 while the Euro-to-Dollar rate was 0.16% lower at 1.2286. the Dollar, Pound and Euro were all down by at least 0.3% against the Japanese Yen. 

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