Euro Builds on Its Gains as Dollar Back Into Political Trouble

The euro extended its recent gains amid concerns by dollar bulls that political turmoil over the Atlantic will push back the implementation of much-anticipated reforms by the Trump administration.

The dollar, as measured by the Bloomberg Spot Index, dropped for a fifth day, its longest losing streak in almost two months. The euro rose above the high seen after the final round of the French presidential elections as hedge funds and macro investors added fresh longs, according to foreign-exchange traders in Europe. The common currency gained as much as 0.7 percent to $1.1050 as of 11:00 a.m. London time, its strongest level since the aftermath of the U.S. elections.

The common currency has risen by 1.7 percent since Friday, and given one-week realized volatility traded near a 2 1/2 year low hit on April 19, further gains may take longer to materialize. Take-profit offers were seen near $1.1050 and $1.1100, said the traders, who declined to be identified as they weren’t authorized to speak publicly. Interbank desks were looking to fade a move below $1.10 instead of chasing the market higher.

Still, the short-to-medium term remains constructive for euro bulls. Volatility smile analysis on the one-week tenor shows how a rise in demand for euro calls has outweighed that for puts since the release of U.S. soft data on Friday. With a lack of hefty nearby expiries up to Wednesday, focus could be drawn toward options worth 4 billion euros rolling over at $1.10 on Thursday.

  • The dollar fell against most of its G-10 peers as U.S. President Donald Trump’s top foreign policy advisers raced to contain political damage from a report saying he revealed sensitive classified information to Russia’s top diplomat during an Oval Office meeting last week
  • The pound rose to its day high at 1.2958 versus the dollar on the release of latest inflation data out of the U.K., only to quickly erase its gains and trade below 1.29 handle; support by 21-DMA at 1.2884 is tested a fourth day
    • Inflation resumed its upward march in April, as consumer prices rose at the fastest pace since September 2013
    • Though in theory higher inflation brings a BOE hike closer, lower disposable income on the back of subdued wage gains puts even more pressure on domestic demand and complicates the textbook effect of higher inflation on the pound
  • Riksbank introduced a tolerance band, providing policy makers more leeway to unwind stimulus; it will start targeting CPIF, an index which factors out changes to mortgage costs, instead of the headline consumer price index
    • Nordea Bank said the changes will have no immediate impact; the krona’s reaction was muted at first, went on a steady decline thereafter and was down 0.1% versus the greenback
    • The Norwegian krone joined the krona’s roller-coaster and erased its early gains