The euro fell even further against the US dollar this week, moving firmly into the danger zone around the $1.05 trading level. To put that level into perspective, over the past two years, the EUR/USD rate has traded in a 17 per cent range from about 1.2250 down to 1.0450.
So ahead of the Italian referendum tomorrow, as investors attach a higher political risk premium to the single currency, the EUR/USD rate is trading very close to multi-year lows – levels that will probably be making European importers feel very nervous.
Keeping in mind that politics is the new big theme in FX right now, one of the EU political risks being factored in is the higher probability of the Italian government losing its referendum tomorrow.
On the same day, Austria may elect a new right-wing president. However, and perhaps more importantly, a Reuters Poll of economists taken in November has attached a 75per cent probability of the European Central Bank expanding/extending Quantitative Easing on December 8.
So what you have is, potentially, an almost perfect storm of euro-negative political and monetary policy risks brewing. This is largely why the euro is about to set its third straight weekly loss against the US dollar, a run that has seen the EUR/USD rate fall by some 5per cent over that period.
USD
There was low volatility across FX markets on Thursday, whereas US was on Thanksgiving holiday. Oil prices decreased as Opec officials met a new hurdle to reach oil quotas agreement: Russia is more favourable to an oil freeze rather an oil cut.
The EUR/USD was bouncing up above $1.06 yesterday morning after hitting a 20-month low this week. The pair remains sensible and could decline again if US data turn out to be strong. No key data in the euro area and US markets were closed yesterday.
GBP
Strong rebound of the exchange rate above £0.85 yesterday ahead of the release of revised Q3 GDP figures. The recent value reached by the UK pound is quite high given the recent history (average price since ‘Brexit’ = £0.86), so it could trigger some profit taking among investors as Brexit-linked uncertainties remain. Political concerns in Europe should nevertheless mitigate a strong rebound of the rate.
UK mortgage approvals data from Thursday rose but the focus was on UK GDP revisions yesterday. Expectations are the UK economy grew by 0.5per cent in Q3, matching the initial estimate.