Confidence in the global growth outlook remained fragile on Wednesday and there was a further underlying shift in market sentiment with global central banks seen as adopting a more dovish stance in response to these concerns. Given that US expectations had already shifted late last year, the dollar continued to secure net support and made gains across the board even with a lack of major domestic economic releases as commodity currencies remained under pressure.
Pound Sterling (GBP)
Although fluctuations in oil prices had some Sterling impact during Wednesday, political developments dominated. EU Council President Tusk maintained a tough stance with controversial rhetoric and, although there were some expectations of eventual compromise, confidence of near-term progress ahead of next week’s scheduled House of Commons debate remained low which limited support. GBP/EUR did make limited headway to around 1.1385, but GBP/USD failed to hold above 1.2950 ahead of Thursday’s Bank of England interest rate decision and Prime Minister May’s meetings with EU officials.
Confidence in the Euro-zone outlook deteriorated further after weak German industrial data while concerns over the Italian outlook were amplified by an IMF report that GDP growth was likely to be below 1.0% in both 2019 and 2020. German yields edged lower and the Euro overall was unable to make any headway. EUR/USD steadily lost ground during the day with 2-week lows around 1.1360. German industrial production declined 0.4% for December, maintaining overall growth concerns with EUR/USD held just above 1.1350 on Thursday as underlying market confidence in the single currency remained weak.
The US trade deficit narrowed for November which provided an element of relief, although domestic influences were relatively limited during the day with no substantive policy comments from Fed Chair Powell. Commodity currencies continued to lose ground with heavy selling in the Australian and New Zealand dollars. Overall confidence in other major currencies remained weak which continued to underpin the US dollar as the currency index hit 2-week highs. USD/JPY again challenged the key 110.00 area on hopes for progress in US-China trade talks, although it again failed to sustain a break through this level.
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