European Session – Pound slips on weak data, Brexit vote but euro firmer ahead of ECB

Raffi Boyadjian, XM Investment Research Desk

Major currencies were struggling for direction in Wednesday’s European session as cautiousness set in ahead of tomorrow’s ECB policy decision and next week’s FOMC meeting. The US dollar and the euro were confined to tight ranges but the pound underperformed as a combination of disappointing data and Brexit developments took their toll on the British currency.

The euro benefited from positive risk sentiment brought about by reports suggesting Italy’s third biggest lender will likely receive a state bailout. This eased concerns about a fresh escalation of the banking crisis in the Eurozone and lifted shares across Europe. The euro edged higher towards Monday’s 3-week high in European trading, hitting 1.0768 dollars. Its gains were somewhat kept in check however, in anticipation that the European Central Bank will extend the asset purchase program by another six months when it meets for a regular policy meeting tomorrow.

The US dollar meanwhile awaited fresh direction from the Federal Reserve as a widely expected rate hike at the FOMC’s upcoming December 13-14 meeting has now been fully priced in by the markets. Investors will be looking to see how many rate increases FOMC members will be projecting for 2017 when the Fed publishes its latest dot plot chart. In the meantime, the greenback was stuck around the 114 level against the yen for much of the day before it slid to 113.70 yen soon after the US open.

The only major data out of the US today comprised the JOLTS job openings. According to the US Labor Department, job openings fell from an upwardly revised 5.63 million in September to 5.53 million in October, though the figure was slightly better than forecasts of 5.50 million.

The pound had a more volatile session as it declined against both the dollar and the euro after industrial output data disappointed. Industrial production dropped by 1.3% month-on-month in October, sharply missing estimates of a 0.2% rise. It follows a 0.4% drop in the prior month. Manufacturing output also missed forecasts, coming in at -0.9% m/m instead of the expected +0.2%. The weaker-than-expected data is all the more surprising given the pound’s sharp depreciation since the Brexit vote and dragged the currency to a 3-day low of 1.2569 dollars in European trading.

Also weighing on sterling was news that British MPs will today vote on whether or not to approve the UK government’s proposed timetable on when Article 50 should be triggered. Parliament is expected to vote in favour of the motion despite limited details being provided by the government. However, the separate issue of whether MPs should also have a say on invoking Article 50 is still being heard by the Supreme Court.

In commodities, oil extended its losses as traders continued to doubt how effective the planned output cut by OPEC will be in reducing the supply glut. WTI crude oil fell to a near one-week low of $50.15 a barrel but recovered slightly to around $50.40 after US oil inventories fell by more than expected. According to the US Energy Department, crude stocks fell by 2.39 million last week compared with expectations of a drop of 1.03 million.

Commodity-driven currencies posted a late rebound, with the Australian, New Zealand and Canadian dollars all rising. The aussie had fallen sharply earlier in Asian trading after Australian GDP unexpectedly declined in the third quarter. However, the aussie managed to reverse its losses to climb to 0.7472. The kiwi was one of the better performing currencies of the day, rising by 0.6% against the US dollar to around 0.7160 in late session, helped in part by stronger dairy prices in yesterday’s global dairy auction.

The Canadian dollar was also firmer but traded within a narrow range despite falling oil prices and the Bank of Canada’s policy decision today. The Bank of Canada kept interest rates unchanged at 0.50% at its meeting today, as expected, but wasn’t as dovish in its accompanying statement as it had been at its previous meeting when it triggered speculation it may be easing policy soon. The loonie strengthened after the announcement, with USDCAD slipping to an intra-day low of 1.3245.