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Euro holds on to its holiday gains as risk assets worldwide post strong gains

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8 January 2018

Written by
Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

Holiday trading in typically thin markets was not kind to the Dollar, which sold off across the board in the last week of the year. The first week of the year saw range bound trading between Sterling, Euro and the US dollar but a significant rally by almost every major emerging market currency. Increasing optimism on a synchronised economic speedup worldwide led investors to snap up risk assets like equities and commodities, and this buoyed most emerging markets, led by Latin American currencies in general and the Colombian Peso in particular.

T
his week’s calendar is fairly light. Eurozone employment out Tuesday, the minutes of the December ECB meeting on Thursday and US consumer inflation out Friday should focus traders’ attention. Core annual inflation in the US has been stuck at exactly 1.7% for 6 of the last 7 months. Consensus is expecting more of the same, so a change in either direction would probably provide some volatility in Dollar trading.

Major currencies in detail

GBP

Without much in the way of UK news either last week or this one, Sterling will continue to trade off of events elsewhere, following tightly the Euro against the US Dollar. A tiny upward revision last week to the composite PMI survey of business activity to a very strong 58.1 seems to confirm that the synchronized global upturn will likely carry the UK in its coattails in the short term, at least. There should be a respite from Brexit news until the end of January, when the EU general council meeting gives clarity on the Commission’s mandate for further talks. November industrial production out on Wednesday should provide some further guidance on the state of the British economy, with the consensus expecting another solid increase.

EUR

This week is also light for macroeconomic news out of the Eurozone. However, the publication of the minutes of the ECB December meeting should provide some badly needed guidance as to the view of the Council. The dichotomy between strong growth and weak inflation is no closer to being resolved. Last week, core inflation disappointed consensus yet again, staying below 1% for the third consecutive month. However, the composite PMI index of business activity rose to yet another cycle high, but so far this has not had any perceptible impact in core inflation.

USD

The headline for the US December payrolls report was slightly disappointing, but the rest of the report was moderately encouraging. The 148,000 new jobs were somewhat less than expected, but that is probably a sign that the US has reached full employment and payroll expansion is becoming more difficult in many sectors.A long term positive is that labour force participation is holding steady in spite of the aging of the Baby Boom generation. All in all, the report does not change significantly the picture of a tight US labour market without (as yet) accelerating wage pressures.

The inflation report out Friday is the key data for this week. An uptick from the current 1.7% level that has held for most of 2017 would materially increase the chances for four full Federalb Reserve hikes this year.

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