Euro Surges Higher

Euro on front foot into year end

The single currency finally summoned up sufficient support to break through stubborn resistance at 1.1880 versus the dollar yesterday. That level has remained intact since the end of Q3 with minor incursions quickly reversed. The next point is 1.1950 and a close above that level will open a move above 1.2000 early in the New Year.

The reason for the Euro’s sudden strength has its roots in trader’s desire to square long dollar positions that they held in anticipation of both the December rate hike and the passing of the fiscal reform bill by Congress. Neither of these issues warrant any follow through since they are now seen as one-offs.

The Tax bill took far longer than it should have to be approved, a testimony to both the influence of the President over his, supposed, Republican colleagues and the nature of a “bill for the few”. The rate hike is now seen as a final effort to quell asset prices buoyed by cheap money. This has been the motive for the three hikes since last December but now inflation is going to be the focus of Fed action.

The dollar index closed at the lower end of its recent range and hasn’t, so far, tested strong support at 92.50.

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Political influences to drive Euro in 2018

The successful emergence of the Eurozone from its own debt crisis has had both positive and negative influences on the people of Europe. The most positive influence has been the instance of the ECB President on maintaining additional stimulus for as long as possible to allow the weaker economies of the likes of Cyprus, Greece, Ireland and Spain to start to grow again.

In the past they would have faced devaluation and years of “economic poverty” before they were able to rejoin the global financial community.

The negative counterpoint to this “centralized” assistance to the weaker economies is the growing influence in Brussels in the daily fabric of these nations and several others.

Now, the rise of nationalist/populist parties is seeing communities starting to push back against the central planning that several former “eastern bloc” nations have only just escaped from. Following elections in The Netherlands, France, Germany and Austria in 2017, 2018 will see polls on varying levels of Government in Belgium, the Czech Republic, Holland, Finland, Hungary, Ireland, Italy and Sweden. There may also be another election in Germany is Angela Merkel is unable to prevail upon her main coalition partner to return to the negotiating table.

In summary, the Eurozone is performing admirably economically but the desire of Brussels to form a more Federal Europe could still bring its downfall.

Sterling clinging on

The pound also made ground versus the weaker dollar yesterday reaching a high of 1.3430 before closing at 1.3402. It has remained positive overnight, reaching 1.3430 again without yet seeing any pullback.

Against the Euro, it was virtually unchanged on the day with just 41 points between high and low. It closed at 1.1268 and as month/year-end approaches there may be a little commercial interest in buying the single currency which could see the resistance at 1.1350 tested.

The pound is facing a range of headwinds as the New Year approaches, all primarily the Brexit driven.

The SME and corporate sectors see investment in their operations as being simply too risky given what they may have to contend with going forward while consumers are looking at a period of consolidation as their spending power is eroded by “twin evils”. Widening of the gap between prices and wages and a greater interest rate burden following the BoE rate hike which will be magnified as it is passed on to domestic borrowers. The housing market is also showing signs of slowing down which will also have a negative effect on both consumer confidence and retail sales.