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US Dollar bloodbath as Euro surges and Sterling hits highest level since Brexit vote

Market Analysis /
15 Jan 2018

The US dollar has continued its sell off in earnest this morning, with EURUSD boosted above 1.2250 as the market still cheers news from Friday of a breakthrough in coalition talks in Germany. German politics aside, the dollar is in trouble across the board with the greenback down against all of its G20 counterparts, with the Euro and Pound both profiting from the negativity. The Dollar index is now trading a lows not seen since December 2015.

The story in Germany has very much helped EURUSD put on the sort of gains we have seen in the last couple of days, after that news of coalition breakthrough. The news has seen the pair put on over 270 points in the last couple of days, taking out levels that were more long term targets, in only a matter of hours. The lack of macro data due for release has led to a continuation of the moves, with no other news flow to take the attention away so far on Monday.

There is a similar move in the Pound which is another benefiting from stories away from US dollar downside. Cable has moved to highs not seen since the EU referendum back in June 2016 after it emerged that both the Netherlands and Spain are said to be seeking a softer Brexit approach that would leave the UK in as close ties to Europe as they can.

This news again seen as good news for both the Euro and Sterling pushed Cable the 1.38 level, however this morning we have dipped slightly below that area. Both the Spanish and Dutch authorities have denied these reports, but that has caused a huge retracement in Sterling. It seems that against the US dollar it’s a case that both the Pound and Euro have hit a sweet spot in news flow timings.

The stories came on Friday afternoon just as US CPI inflation data was disappointing the markets. Inflation is key battle ground in the US and within the Fed as some members are still worried about the stagnant increase in prices. CPI in the US has been running below the Fed’s target for the last 5 years, with signs showing that the rate of increase is not enough to take it close to the 2.5% target in the near term.

The numbers on Friday showed that on both a monthly and yearly basis the inflation data is still stagnant, meaning that those Fed members calling for higher inflation have more ammunition when it comes to the next FOMC (rate setting meeting) at the end of January. Expectations still show that there is only a very slim chance of a rate hike in January with probability running at 99% chance of no change. However as we move to the March meeting the probability for a rate hike by 25 basis points jumps to 87%.

All in all the Euro and Pound have both posted currency positive stories in the last 48 hours, however add this to a continuously weak US dollar, and the outcome seems to only point to a continuation of the current EURUSD and GBPUSD trends. However we must be cautious as we move through the week, as a return of macro-economic data could well lead to a shift in focus, and a change in fortunes for the greenback, which is could well be in line for a substantial correction.

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