Euro rallies off back of Dutch vote

After yesterday’s busy schedule of political and economic events, Thursday is looking rather more subdued, although Eurozone inflation and the Bank of England’s rate setting meeting will ensure there are some meaningful fundamental drivers in play. Oil prices remain worth watching in the wake of the IEA’s report, although any optimism could be misplaced here, especially if we see another uptick in the Baker Hughes rig count tomorrow, whilst precious metals also remain worth watching. Gold is popping higher with comparative dollar weakness just one driver here.

The Traders’ View

Our prop desk is shorting EUR/USD, shorting cable and also showing some renewed interest in shorting US equity indices. A short on USD/CHF as it moved through parity also proved to be profitable overnight.

Fundamentals – Euro rallies off back of Dutch vote


The Euro has pushed out to highs not seen against the greenback since the start of February in the wake of those election results from The Netherlands. The results is being seen as an endorsement of the European project and the common currency is rallying as a result on the basis that this should bode well for elections on France and Germany later in the year. However, the dominant VVD party has only held onto its lead by shifting its own policies to the right - something that arguably initiated the UK’s departure from the EU. It would be no surprise if the degree of cheer we see in the coming hours ends up rather limited.

Eurozone inflation is due at 10am GMT and this figure will be closely followed, Mario Draghi has used the fact that any spike is transitory as a defence for continuing to pursue a lax monetary policy and with crude oil now holding below the $50/barrel mark, this could well be seen as a justifiable approach. However any meaningful jump above the 2% target level could reignite calls by policy hawks for higher interest rates – something that is seen as especially popular from a political standpoint in Germany. Any sense that this will materialise has the potential to give the common currency at least a short-lived shot in the arm.

The Federal Reserve declared its latest hand in terms of interest rates yesterday and as expected we saw a 0.25% hike in the benchmark. However, the more significant point was Janet Yellen’s reassurance that rates would only rise slowly from here and there has been no change to the pace of further policy tightening in the year ahead, with two further hikes still forecast. The absence of any hawkish tone here helped drive cable around one cent higher, adding to the premature boost ahead of yesterday’s UK employment data – which ultimately disappointed – and leaving GBP/USD up around 200 points from the week’s lows. The Bank of England’s rate verdict is due at 12pm GMT today and although we’re expecting no change here, the meeting minutes will be closely followed and could initiate further moves for the pair.

Crude oil prices are moving higher in the wake of a surprise drop in weekly inventory figures from the US, although the more telling information was perhaps held in the International Energy Agency’s report, pointing towards a 500,000 bpd deficit in the first half of 2017 if Opec held its production cuts. This would help with the global rebalancing of the market, although the pace of increased extraction of US shale is the key risk here – along with Opec’s patience surrounding costly production cuts and their failure to significantly boost prices. We have just tipped past $50/barrel but this could be difficult to sustain.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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