The US dollar and the British pound remained the day’s biggest winners in European trading on Wednesday on increased hopes of big tax cuts in the United States and the UK and the EU edging closer to a deal on the Brexit divorce terms. Most majors came under pressure from the stronger greenback, including the euro, which headed for a third straight day of losses, but the resurgent pound capped the dollar index’s gains.
European equities headed higher after another record close on Wall Street overnight, with investors shrugging off a fresh threat by North Korea, which yesterday conducted another missile test. The UK’s FTSE 100 bucked the trend as it was hurt by a firmer sterling, while gold drew no interest from safe-haven flows, dropping 0.5% to $1287 an ounce.
The euro hit a session low of $1.1816, retreating further from Monday’s two-month peak of $1.1960. Another set of solid business survey release out of the Eurozone failed to lift the single currency. The European Commission’s economic sentiment index rose to a 17-year high of 114.6 in November, in line with forecasts. Its business climate index was also up, climbing from 1.44 to 1.49 to a 10-year high, though this was below estimates of 1.53. In an encouraging sign for the European Central Bank, inflation expectations strengthened, with the index increasing from 14.7 to 16.0 in November.
There was little reaction to the ECB’s bi-annual Financial Stability Review but the euro found some support from stronger-than-expected German inflation data. Germany’s harmonized measure of the consumer price index rose from 1.5% to 1.8% year-on-year in November’s flash reading, beating expectations of 1.7%. The data helped the euro recover to around $1.1835 in late session.
Sterling hit a two-month high of $1.3430 on reports that the UK and the EU have agreed the outlines of a deal on the Brexit divorce bill, thought to be around €50 billion. The issue of the Northern Irish border remains a sticking point, but hopes are high that the EU’s chief negotiator, Michel Barnier, will recommend to EU leaders that there has been sufficient progress on the divorce terms for the talks to move on to the next phase at the December summit.
The pound eased a little however, after Bank of England lending figures showed consumer credit growth in the UK hit an 18-month low in October. Sterling was last trading around $1.34, up 0.5% on the day, while the euro was down a similar amount at 0.8830 pounds.
The greenback moved towards one-week highs, with dollar/yen flirting with the 112 level and the dollar index hitting a session high of 93.435. The US currency got a boost yesterday after the Senate Budget Committee gave the go-ahead for a full Senate vote on the tax bill on Thursday. Senators will be debating the bill today with further amendments expected given that several Republican Senators are still opposed to the legislation in its current form.
Uncertainty about tomorrow’s vote, as well as concerns about a possible US government shutdown on December 8 after senior Democrats cancelled a meeting with President Trump to discuss a deal on a new spending bill, have been limiting the dollar’s advance. However, the greenback got an added boost from an upward revision to US GDP. Annualized GDP growth in the third quarter was revised up from 3.0% in the preliminary estimate to 3.3% in the second reading, beating expectations of 3.2%. The figure is the highest quarterly growth since 2014 and is up from 3.1% in the second quarter.
Fed Chair Janet Yellen’s prepared remarks for her semi-annual testimony before the Joint Economic Committee in Congress didn’t attract the usual fanfare as the outgoing Fed chief didn’t add anything new to the monetary policy outlook. Yellen repeated that the recent fall in inflation is likely to be due to “transitory factors” and reiterated that “additional gradual rate hikes” will be appropriate, but avoided specifically mentioning December as the timing for the next increase.
Commodity-linked currencies underperformed today, with the Australian dollar sliding to a one-week low of $0.7552 and the New Zealand dollar dropping to around $0.6885. The Canadian dollar was also down, weighed by weaker oil prices, with dollar/loonie hitting a 4-week high of 1.2859.
Crude oil prices remained under pressure amid doubts about whether major oil producers will agree to an extension of the output cut deal at Thursday’s meeting in Vienna between OPEC and some non-OPEC countries. OPEC sources today suggested that an expected extension of nine months beyond March 2018 could be accompanied by an interim review in June, meaning the deal may end sooner, according to Reuters.
Both WTI and Brent crude stood slightly down on the day at $57.89 and $63.56 a barrel respectively, ahead of the EIA’s weekly US inventory report.