Sterling jumps to six month high versus Euro on Brexit breakthrough

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8 December 2017

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

After a very quiet London trading session on Thursday, news that Prime Minister Theresa May had struck a last minute deal in the first round of Brexit negotiations with the European Union sparked the Pound back into life late yesterday evening.

S
terling rose to a six month high versus the common currency, while touching its highest level against the Dollar so far this week following news of a breakthrough in negotiations that will allow trade talks to go ahead in the New Year. The agreement ensures that there will be no ‘hard border’ between Northern Island and the Republic, while EU citizens living in the UK will continue to have their rights to live, work and study protected.

Last night’s agreement removes a fairly significant downside risk to the UK currency. Investors will be breathing a sigh of relief at the avoidance of a potentially prolonged bout of discussions that would have inevitably delayed future stages of negotiations.

US Dollar touches two week high ahead of nonfarm payrolls report

The US Dollar edged modestly higher against its major peers on Thursday, briefly touching its strongest position in over two weeks against the Euro as investors eagerly awaited this afternoon’s nonfarm payrolls report.

Widely regarded as the single most important economic data release of the month in the currency markets, today’s labour report is expected to show that the labour market in the US continued to show solid signs of improvement in November. Investors will be eyeing another robust level of net job creation around the 200,000 level following on from October’s eighteen month high 261k. Unemployment is expected to remain unchanged, with earnings growth forecast to show a modest uptick to 0.3% month-on-month.

With a December interest rate hike from the Federal Reserve almost completely priced in ahead of next week’s meeting, today’s report is likely to influence expectations for the pace of hikes in 2018, rather than this month’s policy decision itself. We think another solid nonfarm number around the 200k level and positive earnings growth would be enough to cause a rally in the Dollar and support the case for multiple interest rate hikes from the FOMC in 2018.

German industrial production falls for fourth consecutive month

The Euro spent much of the London trading session treading water on Thursday, ending effectively unchanged against the US Dollar. Currency traders were in a fairly cautious mood ahead of a busy couple of week of central bank meetings and political announcements, including the European Central Bank’s December meeting next Thursday.

President of the ECB Mario Draghi spoke in Frankfurt yesterday afternoon, although offered no clues as to what to expect next week. Aside from that, Thursday morning’s German industrial production data was fairly dire, suggesting that Europe’s largest economy could be set to lose steam in the final quarter of the year. Output in the sector unexpectedly shrank 1.4%, its fourth consecutive month of contraction and its largest monthly decline since December 2016. While somewhat concerning, the dip was largely attributed to one off factors and the overall picture for the sector in 2017 has been relatively encouraging.

With no major announcements in the Euro-area today, this afternoon’s US nonfarm payrolls report at 13:30 UK time will be the main driver behind EUR/USD.