Asian Session – Policy divergence boosts dollar and pound; uncertainty still lingers for euro

Michalis Florentiades, XM Investment Research Desk

The dollar rose to near 3-month highs on Thursday but slipped in today’s Asian session. Thursday’s lower-than-expected initial jobless claims raised expectations that a rate rise could come as early as September. The US currency has been rallying since Yellen’s testimony, which set the path for a rate rise at some point this year, dampening expectations by some analysts that a move would be delayed until early 2016.

There were more hawkish tones coming from the Bank of England governor, Mark Carney, who at a speech on Thursday made further comments on the need to raise interest rates sooner rather than later. Carney said “The decision as to when to start such a process of adjustment will probably come into sharper relief around the turn of this year”, suggesting a rate rise at the beginning of 2016.

Both the pound and the dollar gained against the euro on the back of policy divergence between the Eurozone and the UK and US. The euro was steady in Asian session after yesterday’s losses, trading at 1.0884 against the dollar, while against the pound, it dropped to a fresh 8-year low of 0.6944. Sterling also jumped against the dollar, climbing to 1.5667.

The euro was also weighed down by continued uncertainty on whether the latest bailout deal will be enough to help the Greek economy. ECB President Mario Draghi risked angering German hardliners on Thursday by increasing ELA to Greek banks by €900 million before terms of the third bailout have been finalized. This clears the way for Greek banks to reopen on Monday. There was more good news for Greece after EU officials agreed to provide €7 billion bridge financing to cover Greece’s debt repayments over the summer.

Chinese share indices were headed for a strong end to the week as they were up by over 4%. Shares in Tokyo were also positive and were given a small boost by a weaker yen. Having regained the 124 handle on Thursday, the dollar spiked to 124.22 yen in early Asian trade before easing to 124.01 yen. The pound rallied to 194.20 yen but the euro was weaker at 134.95 yen.

After a slow start to the day, it will get busier in terms of data during US session. Inflation figures are expected to be published for the US and Canada, with US CPI forecast to edge up to 0.1% in June. US housing starts are also due today, as well as the preliminary reading of the University of Michigan Confidence index for July.