- Pound to Euro exchange rate taking cues from EUR/USD
- US Federal Reserve + rise in China's offshore Yuan seen as one reason for Dollar’s recent blip
The Euro is starting to lose its shine against the US Dollar as we progress through Thursday January 5.
The single currency found itself in a commanding position through the course of Asian trade as a sudden rally higher in the value of the Chinese offshore Yuan triggered a broad-based Dollar selloff.
The GBP/USD pushed higher as a result.
However, the effect of this rare moment of weakness for the Dollar is starting to wear off; the Pound to Dollar exchange rate is trading at 1.2310 on the spot markets having turned lower from a day's best at 1.2364.
The interactions between the Euro and Dollar are absolutely central to the British Pound which continues to ignore domestic data - no matter how good it may be - and take its cue from external factors.
The strong rally in EUR/USD over the past 24 hours has had the predictable effect of sucking the EUR/GBP higher.
For those looking to buy Euros with Sterling it is the EUR/USD pair that is arguably of most importance at present.
The EUR/GBP rose from 0.8450 seen at the start of the week to record a best of 0.8582. In GBP/EUR terms this reprsents a reversal from a high of 1.1834 to a low of 1.1652.
After spreads are applied, some international payment providers were seen offering rates as low as 1.13 this morning while others were offering rates high as 1.16 confirming readers should ensure they are getting a decent deal on FX requirements.
Why the is Euro Rate is Higher Today
The Euro has shot higher on a combination of reasons:
1) It was heavily oversold against the Dollar leading into the new year, a rebound was needed
2) Eurozone data has been good, in particular the stronger-than-forecast inflation data of Wednesday January 4 suggesting the ECB is on course to hit its 2% inflation target
3) A spike in the value of the offshore Yuan has triggered a sell-off in the USD in Asia. This is arguably the main reason for the Dollar's slip - because it is technical in nature it suggests USD weakness could be limited.
4) The US Federal Reserve. On Wednesday January 4 the Fed released their latest FOMC minutes which gives their insights into monetary policy
The Fed contained two notable takeouts: a faster growth due to a large fiscal stimulus under the new US President Donald Trump’s rule and a stronger US Dollar, which could weigh on inflation.
“Today's FOMC minutes were not as hawkish as we had hoped,” says Kathy Lien at BK Asset Management in a note seen by Pound Sterling Live. “At this stage we are leery of buying dollars as the proof is in the pudding and we need to see consistently strong U.S. data to believe that the Fed will press forward with raising rates in the first 6 months of the year.”
The Fed members readjusted their expectations on the upside, highlighting accrued risks for growth and inflation.
Nevertheless, Yellen and her team will likely continue monitor economic data and global financial developments.
The Fed is expected to hike rates three times in 2017, compared to two anticipated prior to Trump’s victory.
Euro Strength Forecast to be Limited
The Euro is staging a recovery against the Dollar which is helping it advance against the Pound; we could see the move extend further.
“From the technical side, it still appears premature to give the all-clear although the picture has improved markedly after the jump above 1.05. If EUR-USD falls back below 1.0341 again, parity could still be tested,” says Ralf Umlauf at Helaba Bank in Frankfurt in a note seen by Pound Sterling Live.
Analyst Asmara Jamaleh with Intessa Sanpaolo tells Pound Sterling Live that the EUR/USD's rally is likely to run into resistance:
"US data will prevail over euro area data in guiding the exchange rate. Therefore, barring major disappointments from US data, the Euro will face a very solid resistance area at EUR/USD 1.0620-1.0650."
This should support Sterling going forward if correct.
Ahead: US Data to Dominate
The Dollar faces a heavy economic data calendar over the next 48 hours, so expect further twists and turns.
The ADP employment and initial jobless claim figures will attract some attention ahead of the important December jobs report, which is due out tomorrow.
ADP is forecast by economists to read at 179K.
The ISM non-manufacturing index is set to be released, and analysts expect this to show a continuation of the strong growth signals.
However, as the index jumped to 57.2 in November, while the Markit PMI service index stayed more or less unchanged, some see a downside risk to the ISM non-manufacturing index in December due to volatility, and estimate the index declined to 55.9, which is still solid.
Consensus estimates forecast a reading of 56.6.
Of course the big event will be the release of US non-farm payroll data out on Friday afternoon London time.
A reading of 178K is forecast by economists.