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Euro inches up but Italy, Brexit test nerves

London

THE euro edged up from a 16-month low on Tuesday as some investors consolidated positions but concerns about Italy's budget proposals, poor German data and Brexit negotiations sapped broad appetite for the single currency.

While long dollar bets remain among the most crowded trades in the foreign exchange markets, the euro has been pegged back by a series of negative headlines about the European economy, which is struggling to gain momentum.

"The euro's drop below the US$1.13 line surprised some investors and the latest headlines from Italy and Brussels have hardly been conducive for euro bulls," said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets in London.

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Against the dollar, the euro edged 0.3 per cent higher at US$1.1229, above a June 2017 low of US$1.1216. It has fallen nearly 7 per cent so far this year, more than halving its gains from last year.

Tuesday is the deadline for Italy to resubmit its budget proposals to the European Union after a showdown between Rome and Brussels over the government's spending plans that has rattled bond markets and weighed on the single currency.

The progress of Brexit talks with the European Union has been another source of uncertainty for the euro and the British pound. British Prime Minister Theresa May said on Monday that there were still considerable unresolved issues as the two sides approached the "endgame" in negotiations for Britain's departure from the bloc.

Officials have warned that unless there is dramatic progress by the end of Wednesday there is unlikely to be a summit this month to approve a Brexit deal.

"The euro will remain under pressure as the Italian situation and headlines over the progress of Brexit negotiations will give enough food for thought for currency traders," said Morten Helt, a senior FX strategist at Danske Bank.

An overnight rally in the dollar stalled, with the greenback edging slightly lower to 97.628 against an index of its rivals. It had hit 97.70 in the previous session, its highest since June 2017.

Hedge funds have resumed shorting the euro in recent weeks as expectations of a diverging trend in economic growth, and consequently interest rates have encouraged investors to borrow euros and invest the proceeds in US dollars. REUTERS