Euro Continues Rise Against US Dollar

The euro has sustained its appreciation against the US dollar, rising to buying $1.13 this morning GMT.

Selling pressures on the euro have increased, as all major European stock markets have started today on a weaker footing.

The DAX has fell by 2.90%, and the index is now valued at 8755.84, while the CAC 40 has been reduced by a more significant 3.51%, and is now at 3918.70.

Also, the euro was boosted by the US Federal Reserve chair Janet Yellen’s speech yesterday, which warned that financial conditions had worsened in the United States, and that conditions for growth were currently not strong.

This has dented any hopes of a rate rise ordered by the Federal Reserve any time soon, after increasing rates for the first time in nine years to 0.25% in December last year.

SEB Bank Point to Euro as Funding Currency

Richard Falkenhall, Senior FX Strategist at SEB, a leading Nordic corporate bank, has said: “Traditionally, the dollar has weakened in trade-weighted terms, and against the euro after the first rate hike by the Fed in every new hiking cycle since the 1990’s.”

“Although there were reasons suggesting things might be different this time, the recent depreciation of the dollar, triggered by falling risk appetite, is not that unusual after all.”

He added: “It happened because the euro was turned into a funding currency. For EUR/USD to trade lower again, it therefore seems like market risk appetite has to improve substantially.”

Falkenhall concluded that due to current market pricing, there is a 30% chance that the Federal Reserve will choose a one rate hike this year.

This would be a substantial u-turn from the Federal Reserve forecasts, that were made after the announcement of last year’s rate increase, that there would be four rate rises.

The dollar reaction is probably also the flip-side of the behaviour of the euro, Falkenhall believed.

Given the current low interest rates in the euro area, the soft outlook for the European Central Bank monetary policy with more easing to come. And a current account surplus, the euro has joined the yen as a global funding currency.

If then thirst for risk continues to fall, the euro to dollar rate is likely to move higher in the short term.

SEB expect that the euro to the dollar will move lower down from its current levels.

Although it is likely to take a shift in Federal Reserve expectations towards further rather hikes this year, and a trigger that improves market risk sentiment, for this to happen.

UK Commercial Growth Climbs According to Survey

A study from Savills project consultancy, conducted for financial information company Markit, has shown an increase in UK commercial growth activity.

In January this year, a month on month increase was recorded of 3.9%, as the commercial activity index in the survey rose 8.4%, from 4.5% found in December last year.

The increase was due to a softer contraction in the amount of public works, and an acceleration of private sector production.

Despite the rise, future expectation are low, as confidence waned from developers, due to a lack of planning consent, and an interest rate rise dampened expectations.