Euro, Sterling Rises on UK-EU Trade Deal

The euro and sterling rose on Thursday, driven by reports about the UK and the European Union (EU) reaching an agreement on a draft text outlining their future ties before a summit on Sunday.

The single currency climbed as much as 0.4 percent to mark a day’s high of 1.1434 earlier in the session before paring gains to stand up 0.1 percent to 1.1404 against the dollar.

The euro’s optimism against the greenback spread through other currencies as well. Against the Norwegian Krone, the currency rose 0.2 percent to 9.7357, while it advanced 0.2 percent to 1.1352 against the Swiss franc.  

The British pound also hit a day’s high of 1.2927 against the greenback before easing by 0.7 percent to 1.2877.

European Council President Donald Tusk said on Twitter that he sent a draft Political Declaration on the Future Relationship between the EU and the UK to the 27 EU member states, adding that the text had been approved by negotiators and at the political level, subject to the endorsement of EU leaders.

This is encouraging news from an investor perspective as it gives some much needed clarity to investors and companies on both sides but unless political support is garnered, these gains may not be sustained, according to senior FX strategist Jane Foley.

It was reported that the draft text stated that the EU and the UK will commit to deep customs cooperation and build on single customs territory, while the EU is to acknowledge the UK’s independent trade policy and the moving period can be extended for up to one or two years.

Still, gains of the euro were capped as investors’ focus shifted to the minutes of the European Central Bank’s (ECB) October meeting where analysts would be looking for any hints on the ECB considering a new round of policy support to banks to help the euro zone economy.

Dollar Falls for the Second Straight Day

The euro and the pound’s strength showed in contrast to the US dollar’s weakness which fell for the second straight day.

The US dollar index, which measures the greenback’s strength against a basket of six major currencies, dropped 0.1 percent to $96.53, adding more distance from a near 1-1/2 year high of $97.693 reached earlier in the month.

The latest declines come as investors began to question how many times the Federal Reserve can hike rates next year without prompting a slowdown in the US economy, which stood firm so far as borrowing costs have grown.

Three more rate increases are expected in 2019, with federal funds rate estimated at 3.00 to 3.25 percent by the end of next year, although the third rate rise is a close call. Economists now see a 35 percent probability of a US slump in the next couple of years.

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