Politics and Dollar send Euro to years’ low
May 16th: Highlights
- Single Currency struggling for support
- Sterling also falls versus resurgent dollar
- North Korea threatens to cancel Trump summit
Euro at a crossroads
The euro is struggling for support as the market understands that the European Central Bank is unlikely to take any action either verbal or material to halt any weakness.
The market totally disregarded comments from Banque de France President François Villeroy de Galhau, a candidate for the Presidency of the ECB, in which he stated that as the Central Bank’s Asset Purchase Scheme ends, they will most likely provide advance guidance as to when rates will start to be increased.
Despite being ignored, de Galhau’s words have a ring of truth since, unlike the Bank of England, the ECB has no desire, or need, to “jawbone” the currency higher.
The euro fell to 1.1837 yesterday and closed close to that level. Overnight, it has made a fresh low of 1.1815 (0630 BST) although there is likely to be some degree of support around this level.
The probable radical actions of the new Italian Government towards Brussels will be a continuing theme, adding to Euro weakness in the short-term, as just how far they are going to push for reform and support becomes clear.
Sterling falls versus dollar but rallies versus weakening Euro
Traders understand it is something of a misnomer to say that unemployment has fallen to its lowest level in forty years as the data is often massaged to include several factors that have been disregarded in the past. For example, young unemployed who are attending training courses. This group receive an allowance for attendance which means they don’t receive unemployment benefit and therefore do not appear as unemployed.
While the headline is not as unreliable as in the U.S., the markets attention was drawn to the data for wage increases which was again above core inflation meaning that real wage growth has again turned positive. This should have provided a boost to the pound, but next week’s inflation data is causing concern since the pound’s recent fall will most probably see the recent fall stall.
Versus the dollar, the pound made a fresh 2018 low of 1.3451 before rallying to close at 1.3503. Overnight it has remained in a very tight range trading between 1.3513 and 1.3484. Against the euro the pound rallied yesterday reaching 1.1412 and has continued to climb overnight as the single currency plumbs the bottom of its range.
Dollar rally still unable to break 93.50
The dollar index surged higher as its largest component, the euro, weakened magnifying the rally. It has still been unable to break the 93.50 resistance, which has held firm in recent weeks, making a high of 93.46. Overnight the index has been treading water trading in a narrow range close to the high.
Joint U.S./South Korean military exercises close to the border with North Korea have spooked Pyongyang, leading to the cancellation of a high-level summit due to be held next week and threaten to derail the June 12 summit between President Trump and Kim Jong-un as Kim labelled the exercised “preparation for an invasion”. He went on to call for a more moderate demands from Washington than demanding the unilateral scrapping of all his nuclear weapons.
Clearly, the optimism generated in the past few weeks has started to evaporate a little but unless the Singapore Summit is cancelled the effect on the dollar will be minimal.
Have a great day!
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”