Euro Weekly

It has been a dramatic week for the Brexit negotiations, and this was reflected in the pound. News of a deal on the divorce bill had bolstered hopes that the first stage of negotiations was drawing to a conclusion. However, rebellion from the DUP and Brexit secretary David Davis’ admission that the government’s impact assessments don’t exist cast the negotiations back on thin ice. Michel Barnier, the EU’s chief Brexit negotiator, gave Downing Street 48 hours to come up with workable proposal for the Irish border. Theresa May negotiated through Thursday night to confirm an agreement which led to the levels against the euro show the pound breaking a key level at the top of the recent sideways range. Aside from the ups and downs of Brexit, there was little to move the pound, with a mixed bag of statistics that included better than expected UK purchasing managers’ index readings last Friday and the services PMI this week was lower on the month, and at 53.8 it was quite a bit weaker than expected.

The euro’s attention has largely been elsewhere. German factory orders showed increases of 0.5% and 6.9% on the month and the year and Swiss inflation rose to 0.8% in November as expected. However, year-end demand by European banks for dollar funding has also contributed to the euro’s weakness in recent days. The euro has fallen from a high of $1.1960 on November 27 to $1.1785 yesterday — a fall of 1.5 per cent. The dip has pushed the year-to-date advance to 12.2 per cent, according to Reuters data. This is a familiar occurrence, however, and recurs over the past few years and isn’t expected to indicate any longer term softening of the currency.

Whatever the global response has been to Donald Trump’s comments regarding Israel, it doesn’t appear to have weighed on the US dollar as attention focussed largely on domestic issues. America’s $48.7bn trade deficit in October was the widest in nearly two and a half years. That figure was followed by two US services PMIs. One of them missed forecast by a point, the other by a point and a half. The dollar hesitated after the data but came back to add a net half-cent against sterling and a quarter of a cent against the euro. The dollar rose against a trade-weighted basket of its rivals on Friday, and is on track for its biggest weekly rise in nearly six weeks as optimism grows that a U.S. tax bill will pass.

Meanwhile in Canada, the Canadian dollar weakened against its U.S. counterpart during the later part of the week after the Bank of Canada held interest rates steady and tempered expectations for a hike early next year. The tone of the central bank was more dovish than expected, particularly given last week’s strong employment data.

Down under, the Australian dollar came to grief on account of weaker than expected third quarter growth. The predictions for Australian gross domestic product were that it would have expanded by 0.7% in Q3 and be up by 3.0% on the year. Both of those targets were missed. Third quarter growth of 0.6% brought annual growth down to 2.8%. It was a case of swings and roundabouts when it came to the stats – imports went up by 2% in October but exports were down by 3%.

The New Zealand central bank gave some hope to the kiwi dollar, which edged higher earlier in the week after a statement regarding the potential to address low inflation with tweaks to monetary policy. However, later in the week, disappointing trade figures across the Tasman meant that the New Zealand dollar followed its Australian counterpart lower.

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