FX Update: Euro malaise deepens. Sterling mounts comeback.

FX Trading focus: The Euro in the dumps, in part as sterling mounts steep comeback.

The euro just keeps tumbling as the EURUSD didn’t even bother to respect the lower bound of the descending trend channel as yesterday’s action saw the pair accelerating lower below 1.1400. The backdrop, as noted, is one of a dovish ECB unwilling to signal the outlook for tightening, as the primary culprit of the latest bout of inflation will be attributed to the growth-killing spike in natural gas and power prices. After the enormous spike last month, natural gas prices settled recently in a range that is several multiples of longer term averages. And today we get a fresh spike higher in EU spot natural gas prices on the news that Germany is temporarily suspending the certification of the NordStream2 pipeline. That issue and the euro’s pain is clearly now linked to the stand-off at the Belarus-Poland border on the migrant crisis there and the Russian troops apparently massed at the Ukrainian border. A swift recovery for the single currency would require talks that remove these two issues and then a subsequent proper opening of theNordStream2 pipeline that crushes gas prices.

Too boot, yet another Covid wave is descending over EU countries, leading to fresh limits on activities and the fear of fresh lockdowns. Germany is heavily affected and announcing its highest daily case counts ever recently. The German coalition talks resulting in choosing the LDP’s  Lindner as finance minister could be the next risk for Europe. As recently as yesterday, the latest is that the Greens and the LDP are at odds over climate policy-related spending.

Things are looking very different for sterling at the moment, which is also affected by the natural gas price situation, but where we have seen a flurry of more supportive developments. These include the news that Royal Dutch Shell plans to drop the “Dutch” from its name and move its headquarters and tax base exclusively to London, a vote of confidence in post-Brexit UK. As well, Bank of England governor Bailey was out saying that he is “very uneasy” on high inflation readings in a hearing before a parliamentary committee (though the market knows it needs to discount Bailey rhetoric after getting burned by a far more dovish BoE meeting last week than expected.) And then we had quite supportive September payrolls and October claims data today that was the first post-furlough scheme data points for the former, data that the BoE said it was important to have a look at before hiking rates. Odds are now tilting in favour of a December BoE meeting hike.

Chart: EURGBP
Some of the recent pounding on the euro has been at the hands of the very strong sterling, which as noted above, has recovered all of the losses from the terrible BoE meeting last week on a trifecta of fundamental (jobs), central bank jawboning and the Shell news. The yield spread between the euro and sterling is not yet at a new high for the cycle, and sterling has proved vulnerable to weak risk sentiment in the recent past despite the huge repricing of the forward curve for the Bank of England, so we may need to see a relatively positive backdrop to keep the course lower and beyond the big cycle lows from the entire post-Brexit vote of 2016 in the 0.8275 area.