EUR / USD
The Euro attempted to recover some ground in early Europe on Monday but was unable to make significant headway as underlying sentiment remained negative. There were further concerns surrounding coronavirus developments with unease surrounding the latest imposition of restrictions and fears that further measures would need to be introduced over the next few weeks. In this environment, there were further concerns that the economic recovery would be compromised.
The German Bundesbank stated that inflation was likely to be just below 6% for November and the economic recovery is likely to take a breather.
ECB council member Kazaks stated that the bank can look through transitory price pressures, but would need to act if supply shocks put upward pressure on wages.
Just after the New York open, President Biden announced that he would nominate Federal Reserve Chair Powell for a second term with Brainard as Vice-Chair. Although the decision was in line with expectations, there had been significant speculation that Brainard would be nominated as Chair. Overall, there was speculation that monetary policy would be slightly more restrictive under Powell than Brainard and the dollar posted net gains after the decision, especially with speculation that underlying inflation concerns will force a faster pace of tightening. The Euro dipped to fresh 20-month lows below 1.1250 as the dollar posted a fresh 16-month high.
Euro-zone consumer confidence dipped to -6.8 for November from -4.8 previously and below market expectations of -5.5.
Markets will assess the latest business confidence data due during Tuesday for evidence on underlying trends in the Euro-zone and US economies.
The dollar maintained a strong tone on Tuesday with a further advance against commodity currencies with the Euro just above 20-month lows of 1.1225 seen overnight.
The Chicago Fed national activity index strengthened to 0.76 for October from a revised -0.18 previously with strong employment data and a rebound in industrial production. Existing home sales edged higher to an annual rate of 6.34mn from 6.29mn previously.
The nomination of Powell for a second term as Fed Chair triggered losses in US Treasuries after Monday’s New York open and yields moved higher. The two-year yield also increased to the highest level since March 2020 with a rate above 0.55% following another poor auction result.
US equities had been concerned that a Brainard nomination would trigger tighter regulation surrounding Wall Street and the decision to nominate Powell caused some relief for equities which also tended to undermine the Japanese currency. In this environment, the dollar posted sharp gains to around 114.75 at the European close with the yen losing ground on the major crosses. The yen failed to recover despite a retreat in US equities.
There was further speculation that the Chinese central bank would ease monetary policy while Asian equities were again mixed. US yields continued to move higher and the dollar moved above the 115.00 level for the first time since March 2017. It traded around 115.10 at the European open with the Euro around 129.30.
There were no major UK developments during Monday, but markets did fret over the risk that the UK would also have to impose restrictions to curb coronavirus infections. The UK currency was unable to make headway against the dollar and dipped to test support below 1.3400 following the nomination of Powell for a second term as Fed Chair. Overall risk conditions were slightly less confident late in Europe as equities also edged lower.
The latest UK business confidence data will be watched closely on Tuesday with expectations that the PMI readings will weaken on the month. The Bank of England will be monitoring employment, costs and pricing indices closely within the data.
Higher US yields limited potential support for the UK currency and it traded below the 1.3400 level against the dollar on Tuesday with the Euro around 0.8390.
The Swiss franc weakened on Monday, although the overall tone remained notably firm with losses recouped quickly.
Swiss sight deposits increased only marginally to CHF719.3bn in the latest week from CHF719.2bn the previous week which did not suggest that the National Bank had been intervening significantly to weaken the Swiss currency. Next week’s data will be watched closely to assess whether the latest franc gains have triggered a response.
The Euro was unable to challenge the 1.0500 level and settled little change while the dollar peaked close to 0.9320. There was little change in underlying trends on Tuesday with the dollar at 7-week highs around 0.9330 while the Euro remained held below the 1.0500 level.