Euro Rises Versus Pound and Dollar on North Korea Fears

The Euro exchange rate complex is seen rising at the start of the new week morning as it appears to have reverted to its old relationship with global sentiment, a relationship in which it gains during crises, like the Swiss Franc and gold.

Pyongyang's increasing provocation - most recently with the testing of an H-bomb over the weekend - has led to investors pulling out of risky investments and seeking safer-havens instead. The testing of the bomb is the latest in the escalations of tensions surrounding North Korea which is adopting an increasingly aggressive stance towards its neighbours and the United States.

This has benefited the Euro which has become a favoured funding currency for risky investments due to its record low-interest rates, which essentially mean investors can borrow for next to nothing and invest the proceeds in high yielding riskier projects abroad.

Geopolitical fears brought those investments 'home' on Monday as investors unwound their riskier plays and repatriated their Euros, leading to a rebound in the single currency.

Analyst Petr Krpata at ING Bank  N.V. in London notes the Euro's growing "safe haven properties" while noting the US Dollar "is falling in the pecking order of safe haven currencies within the G10 FX space."

The Euro to Pound Sterling exchange rate (EUR/GBP) rose to 0.9185 from Friday's close of 0.9157.

The Euro to Dollar exchange rate (EUR/USD) also rose to 1.1894 from Friday's 1.1859.

We do expect the Euro's advance to be contained however ahead of Thursday's European Central Bank meeting.

Just how serious North Korea is regarding the use of weapons and pushing the envelope ever further is also questionable. 

"The impact on the risk sentiment may not to be long lived. This was the case last month and with risks now being well known, we are likely to observe a diminishing effect of the headline news on global markets," says Krpata.

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Central Bank Expectations to Keep Euro Gains Capped

The Euro had lost ground at the end of last week after a report on Bloomberg suggested the European Central Bank (ECB) was going to delay ending its stimulus program.

The stimulus program is negative for the Euro so any delay is likely to weigh on the currency.

Reports suggested the ECB was concerned about the effect of the strengthening Euro on inflation expectations, as the currency has gained over 14% since the start of the year.

A stronger Euro means imports into the Eurozone are relatively cheaper, thus reducing imported inflation.

Inflation rose to 1.5% in the latest figures, however, this is viewed as a peak by analysts, who expect the ECB to downgrade forecasts at their rate meeting on Thursday as a result of a strong Euro, and use that as an excuse to keep the stimulus program active.

Previously expectations had been for the Bank to announce a reduction in stimulus in "the fall" according to their own guidance which could mean September or October, however, this has been brought into doubt.

The small gains made by the Euro on Monday morning may not be sustainable according to Ipek Ozkardeskaya, Senior Analyst at LCG.

"The EURUSD opened in the positive territory due to the broad USD depreciation. However, there is a rising anxiety among euro buyers before the European Central Bank’s (ECB) Thursday meeting. The strong Euro could result in a more cautious and more dovish-than-priced ECB verdict. The ECB is now expected to wait until October to announce the future of its asset purchases program.," said the analyst.