Forex quiet as EU officials head to Brussels

Currency trading is off to a rather quiet start on Thursday as traders expect to hear little news out of an EU summit starting when European dealing desks close. There may be an update after officials conclude the first day of talks late in the Brussels evening, but don’t count on it. The single currency has stopped its decline and is rising against the majority of its trading partners. Risk is ever so slightly back on the agenda after a rocky-ride earlier in the week but progress is painfully slow as investors wind down into the holiday season.

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Euro – Hopes are building for an amendment to the wording of the Lisbon Treaty, which binds member nations to act in agreement over policy. The common aim is to buttress the stability of the euro currency while maintaining strict conditions on governments unfortunate enough to be in need of assistance resulting from debt distress. Chancellor Merkel is insistent that the bailout fund should not be enlarged and that it should only be used as a “last resort.” Germany also opposes the notion of joint-issuance of national bonds in fear of a loss of its credit-worthiness. The Munich-based IFO institute estimates that German taxpayers would face an annual increase in interest costs of €13.4 billion if joint-borrowing is implemented. The single currency is marginally higher against the dollar at $1.3250 after the December PMI survey showed surprisingly strong manufacturing activity sparked by a very healthy German performance.

U.S. Dollar – The dollar index is 0.25% lower this morning and is lower against the pound, euro and yen ahead of a report likely to show housing starts rebounded last month while building permits are also expected to increase. The index stands at 80.06 and is a little weaker as some of the European fears are receding on the eve of the EU summit. Initial jobless claims are also due later this morning with analysts predicting a minor rise from last week’s reading of 421,000.

Aussie dollar – An RBA report showing rising concerns over inflation trends boosted the Aussie, which rose to 99.02 U.S. cents this morning. Yesterday the unit reached a session-low of 98.55 cents. The Reserve Bank highlighted a notable pattern of sustained price increase emanating from the utilities sector, which it predicted are likely to remain prominent for several years. Gains for the Aussie were capped, however, by talk from China that bank lending might be further restrained in an attempt to keep the lid on both inflation and still strong readings of growth.

Canadian dollar – The Canadian dollar is moving ahead against the greenback and today buys 99.60 U.S. cents in quiet trading. With risk marginally back on, the Canadian feels the warmth of firming commodity plays, although the price of crude oil remains heavy this morning.

British pound – It’s hard to tell whether the proximity of a hike in sales tax is bringing forward consumption to this year, but retail sales data again came out on the firm side to suggest that. Alternatively, sales could simply be strong just like every other facet of the economy seems to be at this point in time, with the exception being the housing sector. The pound made fools of recently bearish traders and rebounded sharply from a midweek low at $1.5531 to trade at $1.5632 at its best this morning. In January British shoppers will face a 20% sales tax as a result of a 2.5% increase implemented in the post-election emergency budget. The euro weakened to buy 84.81 pence.

Japanese yen – The yen tumbled against the dollar overnight to ¥84.51 before storming back against a weakening greenback to stand at ¥84.07. Against the euro the yen moved slightly higher to ¥111.31.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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