The U.S. dollar has continued its sell-off in earnest this morning, with the euro/U.S. dollar (EUR/USD) currency pair 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 U.S. Dollar Index is now trading at lows not seen since December 2015.
The story in Germany has very much helped EUR/USD 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 in 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 U.S. dollar downside. Cable has moved to highs not seen since the European Union 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 the Sterling pushed the 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 the Sterling. It seems that against the U.S. 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 U.S. CPI inflation data was disappointing the markets. Inflation is key battleground in the United States and within the Fed as some members are still worried about the stagnant increase in prices. CPI in the United States has been running below the Fed’s target for the last five 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 a 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 U.S. dollar, and the outcome seems to only point to a continuation of the current EUR/USD and to the British pound/U.S. pound (GBP/USD) currency pair 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.