Euro breaks above 1.20 for first time since January 2015

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30 August 2017


The common currency briefly soared to its strongest position in two-and-a-half years against a broadly weaker US Dollar on Monday, extending its gains to almost 1% at one stage for the week.

nvestors have turned their attention to the diverging economic performances across the Atlantic after neither President of the European Central Bank Mario Draghi nor Federal Reserve Chair Janet Yellen touched on future monetary policy at last week’s Jackson Hole conference. Draghi’s refrain from commenting on the strength of the Euro and Yellen’s lack of clarification over a possible December rate hike has further exacerbated the recent uptrend in EUR/USD, which has now risen by almost 15% this year alone.

However, we think economic fundamentals in the US are not nearly as bad as the current exchange rate would suggest. Today’s GDP data and Friday’s nonfarm payrolls report could provide some respite to the currency if they surprise to the upside. In the meantime, this afternoon’s ADP employment change number could give us a decent indication as to the strength of this week’s far more important labour report.

Risk sentiment also took a beating with investors piling into safer currencies and selling the Dollar on geopolitical risks. News during early Asian trading that North Korea had launched a missile over Japan sent jitters around financial markets. The increase in military tensions between the two countries, and the potential backlash from US President Donald Trump, further soured sentiment towards the greenback and caused another sharp rally in the Japanese Yen.

Sterling also benefitted from broad Dollar weakness, hitting its highest level in over two weeks as tensions escalated in North Korea. Gains for the Pound have been tempered somewhat by the ongoing uncertainty over the Brexit negotiations that have seen the UK currency slump to a fresh 10 month low versus the Euro. Investors have been paying close attention to the third round of negotiations this week which began on Monday. Britain’s government has laid out a number of compromises that were likely to block progress in talks this year. This has come off the back of EU officials voicing concern that progress in talks was too slow.

This week looks set to be a relatively quiet one in terms of data announcements in the UK with Friday manufacturing PMI the only major release of note. Events elsewhere, namely Friday’s nonfarm payrolls report, will take on greater importance.