Forex Market Review (European Session) – Dollar slumps below 112 yen as gold surges; euro and pound extend gains

Raffi Boyadjian, XM Investment Research Desk

The US dollar remained under pressure in European trading on Wednesday as the political turmoil in the United States continued to dampen risk sentiment. The yen and the Swiss franc, along with gold, were the main winners from the risk aversion generated by the latest political uncertainty. The euro meanwhile held near its earlier highs and the pound also advanced higher versus the greenback.

According to confirmed reports, a memo written by the then-FBI Director James Comey reveals President Donald Trump urged Comey to “let go” of the investigation into Michael Flynn’s possible ties with Russia. Michael Flynn was forced to resign as Trump’s national security advisor earlier this year after admitting he had misled the US vice president with incomplete information. The latest allegations against Trump have cast further cloud over his presidency, which has been rocked by controversies since taking office.

The greenback lost ground against most major currencies, particularly against the yen, but fared better versus riskier commodity-linked currencies. The dollar broke below the 112 yen level in late European session in the absence of any major data out of the US today. It hit a two-week low of 111.40 yen, and the dollar index touched a fresh 6-month low of 97.74, retracing all of its gains since the US presidential election.

The euro hit a fresh 6-month high against the dollar, hitting 1.1146 dollars, and was also higher versus sterling but fell back against the yen. The single currency eased from earlier 7-week highs against the British currency to decline to 0.8590 pounds in late session, though this was still up on the day. It fell to around 124.05 versus the yen as it retreated from yesterday’s 13-month highs.

Fading political uncertainty in Europe following Macron’s victory in the French presidential election continues to underpin the euro, and there was an added boost today from the latest polls in Germany, which showed Angela Merkel’s party is increasing its lead ahead of the September general election. There was little reaction to the final estimates of Eurozone CPI for April. Annual inflation in the euro area was left unrevised at 1.9% year-on-year in April and core inflation at 1.2%.

The pound was lifted from the latest UK unemployment data, despite a mixed report. Britain’s jobless rate unexpectedly fell to a 42-year low of 4.6% in the three months to March, with employment rising by a healthy 122k in the first three months of the year. However, jobless claims rose by a bigger-than-expected 19.4k in April and was accompanied by an upward revision to the March figure, suggesting a cooling labour market. In addition, average weekly earnings rose by just 2.4% y/y in the three months to March, creating the worst pay squeeze for British workers in three years. The figure was in line with expectations and up from the prior 2.3%, but compares with a headline inflation rate of 2.7%.

Sterling climbed to a more than one-week high of 1.2990 dollars after the data, with the focus now moving to tomorrow’s retail sales figures.

Among the safe-havens, apart from the yen, the Swiss franc also made broad gains, rising by around 0.7% against the greenback to 0.9788 per dollar, and by 0.3% versus the single currency at 1.0893 per euro. Gold was up too, surging by 1.7% in late European trading to a two-week high of $1260 an ounce.

Commodity currencies took a knock from today’s risk-off mood, with the Australian dollar sliding back below the 0.74 level against the greenback, while the loonie weakened to 1.3613 per US dollar. There was little reaction to Canadian data, which showed manufacturing sales rising by 1% month-on-month in March as expected.

Oil prices more than recouped yesterday’s losses when they fell after the weekly API inventory numbers showed a surprise build in US crude stocks. This contrasted with the official inventory data released today by the US Energy Information Administration. Oil inventories fell by 1.75 million barrels in the week of May 8. The drawdown was less than the consensus forecasts but nevertheless lifted oil prices. WTI crude jumped to $49.50 a barrel in late European session, while Brent crude rebounded to $52.47 a barrel.