In technically driven trade, the British pound fell sharply and hit a four-week low against the euro, with no UK economic data persuading investors to take profit on the pound’s strength. The euro extended its strong run against the US dollar and yen supported by year-end demand and reduced bets about further monetary easing while the US dollar experienced a mixed session as investors continue to weigh the possible outcome from next week’s Federal Reserve policy decision while lawmakers in Washington made positive progress on a new budget deal. In New Zealand, the central bank made no changes to its policy but did point towards rate hikes in 2014.
Sterling
The pound dropped sharply against the euro with no key economic data from the UK leaving sterling open to technically driven trade in which investors decided to cash in on the pound’s fourth quarter rally. The UK currency sank by almost 0.9 per cent against the euro at one stage, hitting its lowest in four weeks, whilst also slumping to a two-week low on a trade-weighted basis. Sterling also fell against the US dollar and yen but has bounced back somewhat in early trade.
US dollar
The US dollar experienced a mixed session as investors continue to weigh the possible outcome from next week’s Federal Reserve policy decision while lawmakers in Washington made positive progress on a new budget deal. Further voting is still required but it seems likely that a fiscal agreement in Washington will come soon, and remove the risk of new budget battles and the chance of another government shutdown in early 2014. With the chances of fiscal restraints on the US economy dissolving, the Fed could now make an early move on tapering. Should Chairman Ben Bernanke launch the Fed’s plan to begin reducing monthly bond purchases as early as next Wednesday, the US dollar could strengthen broadly before the holiday break.
Euro
The euro extended its strong run against the US dollar and yen, and rose sharply to a four-week high against sterling, supported by year-end demand and reduced bets about further monetary easing. The euro has risen for five straight sessions against the US dollar since the European Central Bank last week eased speculation that it was close to launching negative interest rates in order to boost the economy. But much of the euro’s outperformance has been more a function of investors reducing short positions, or bets the euro would fall. Underscoring how the region’s economy faces a long road to recovery, and the risk of additional monetary stimulus, data this week has shown that consumer price inflation in both Germany and France remains weak.