The US dollar trades on the back foot again despite equities slipping mildly lower. Positive vaccine news continues to flow, and crucial risk events turned to be in favour of the common currency.
The US Food and Drug Administration backed the Pfizer vaccine and official approval for the Emergency Use Authorization seems to be imminent. The next FDA advisory panel is expected to take place on December 17, where the Moderna vaccine will face the same process. Hopes for a fiscal deal remain alive as well. Broader negotiations are set to take place next week. Regardless, House Republican leader McCarthy and House Majority leader Pelosi both voiced their conviction for a deal.
Risk events in euro’s favour
The EUR/USD pair advance has regained steam and the main currency pair trades within a stone’s throw distance from recent highs and above 1.2150. The common currency is supported by the outcome of the European Central Bank’s meeting as well as budget agreement. The spat between Poland and Hungary with the EU on the rule of law mechanism is over. The EU budget agreement saw its official passage on the ongoing Summit. While it is undoubtedly beneficial for the euro, the zloty and forint have been recently under more substantial negative influence of the issue as both countries faced the danger of being excluded as beneficiaries of the Recovery Fund. As a consequence of the agreement, the EUR/HUF pair and the EUR/PLN pair turned lower, and both currencies outperformed the emerging markets space (together with the ruble and the Brazilian real, which continue to retrace this year’s sharp losses in a benign risk environment).
More importantly for the euro, the December ECB meeting was slightly hawkish relative to expectations and therefore, bullish for the EUR/USD pair. The Governing Council underlined the persistence of stimulus, opting for increasing the PEPP envelope by EUR 500bn and extending the programme until at least March 2022. The ECB recalibrated a range of other measures, mainly LTRO terms and reinvestments. At the same time, it also signalled soft targeting of financial conditions instead of a quantity-focused approach to asset purchases. Potentially it might lead to not using up the full envelope of PEPP. Moreover, the ECB did not suggest it might consider rate cuts in the nearest future and apparently, the exchange rate has not yet reached a concerning level. Indeed, the trade-weighted euro is stable but stays on elevated levels. In contrast, in September, before the ECB voiced its concern, the rise had been sharp and dynamic.
The pound sterling remains weak and volatile
This week the pound sterling stands out as the major underperformer and the only G-10 currency which has failed to advance against the dollar. The threat of the EU-UK Brexit talks collapse pushed the EUR/GBP pair sharply lower, and the GBP/USD entered a downward, jittery correction. The decision on the future of the negotiations will be taken over the weekend, but the case for a no-deal scenario has definitely strengthened. The pound sterling declined almost 1% against the US dollar this week, and as far as the cable is concerned, recent lows at 1.3250 remain exposed. In the G-10 space, the Australian dollar has recently appreciated and consequently, the AUD/USD pair rises towards 0.76, the level last seen in 2018.
Conotoxia research team