A 'Bruised' Dollar Dominates Moves in Euro and Pound Sterling

Forget the UK budget - the past 24 hours have seen currency markets driven in large by renewed weakness in the US Dollar.

The Dollar is struggling, in mid-week trade it was the worst performing major currency and on Thursday, November 23 the Greenback is in the red once more.

Over the course of the past trading week, the US Dollar is nearly a percent lower against the Pound and half a percent lower against the Euro. The EUR/USD has risen to 1.1835 from this week's low at 1.1712.

In current market conditions this move matters as the rise in the world's largest exchange rate - the EUR/USD - has also pushed up the value of the EUR/GBP exchange rate cross.

This is why the Pound has fallen back against the Euro over the past two days: The Pound-to-Euro exchange rate is now quoted at 1.1257 having been as high as 1.1308 earlier in the week. The Pound-to-Dollar exchange rate is now at 1.3316 having opened the week at 1.3212.

We therefore believe the Dollar is key to movements in Sterling at present, largely because foreign exchange markets are heading into year-end where activity is typically expected to fade.

"The year-end doldrums have started," says Kit Juckes, an analyst with Société Générale in London, "particularly in the case of the major pairs."

However, the message from Juckes is that the market is unlikely to move significantly over coming weeks so don't get too excited; "the Euro excitement over the summer has died down as EUR/USD too settles into a range. Between now and the New Year, we are unlikely to see any fresh policy signals from the BoJ, ECB or Fed."

But Juckes does single Pound Sterling out as being one currency that could move, owing to important Brexit-related events marked down on the calendar.

"The one area where there might be room for a significant surprise is Sterling, with the key EU summit in December that could well decide whether Brexit will be hard or soft," says Juckes.

We have seen the Pound find better support over recent days amidst suggestions the UK is willing to make a significant overture to the European Union with regards to the amount they are willing to pay as part of an exit bill.

It is believe the UK will increase their offer up to about £40BN; something markets believe will unlock talks and push them towards covering issues of trade and the future relationship.

What's Bothering the Dollar?

The EU summit is still however some time away, so we could see near-term moves in the Pound and Euro continue to be impacted by moves in the Dollar.

The Dollar was seen weaker mid-week on the release of the minutes for the Federal Reserve's November 1 policy meeting which prompted a softening in expectations for interest rate rises in the future.

"There remains an on-going debate around the outlook for inflation with some FOMC members looking for further price gains before they are comfortable with the outlook for prices, which could impact rate increases in 2018," says Kathleen Brooks at City Index.

The inflation/interest rate rise theme had however already been giving the Dollar a headache heading into the release of the minutes.

"The Buck was already stressed into Wednesday on the Fed Chair’s renewed subdued inflation concerns. Disappointing US durable  goods orders later in the day only aggravated the already bruised Dollar sentiment," says Joel Kruger, an analyst with LMAX Exchange.

Federal Reserve Chair Janet Yellen told reporters she believes inflation in the US was heading back towards 2.0%, but her conviction is low. In fact, the head of the US central bank said she is "very uncertain" on the issue.

If inflation does not rise as fast as the Fed expects, then the need to raise interest rates is diminished, and expectations for higher interest rates are a key pillar for the Dollar.

Concerning the outlook, technical analyst Karen Jones at Commerzbank believes the Euro will likely advance higher against the Dollar, "EUR/USD is viewed as stable to positive while above the 20 day moving average at 1.1691 we will continue to assume a near-term upside bias."

It will be interesting to note whether the strengthening EUR/USD will continue to impact on the EUR/GBP.

With US markets closed for the Thanksgiving holiday, don't be surprised if this is indeed the case owing to expected lower volumes in the market.

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