Political noise in Germany continued to draw markets’ attention during the European trading hours as the economic calendar was lacking major releases and any progress on the US tax reforms was expected only after the Thanksgiving holidays. The euro was on track to erase losses made in the previous session but dovish remarks by the ECB President pressured the currency. The dollar was in the green during the session while the pound drifter higher as hopes on Brexit negotiations moving forward appeared on the horizon.
Following a strong sell-off in Asia, the euro managed to recover from a two-month low as investors retained their confidence in the eurozone amid optimism on the block’s relative economic momentum. Late on Sunday, the German Chancellor, Angela Merkel, had announced that coalition talks had failed to reach a three-way agreement after the FDP decided to pull out from the negotiations as the parties were unable to find a common solution to key issues. Later on Monday, the German President, Frank-Walter Steinmeier speaking to reporters after a meeting with Merkel, urged parties to resume negotiations prioritizing the nations’ interests, signalling that he did not prefer new elections.
Meanwhile, in the monetary policy front, the ECB chief, Mario Draghi, testified before the European Parliament’s economic committee in Frankfurt. Draghi highlighted that inflation has not shown self-sustained upward trend yet, while the labour market "still need time to translate into more dynamic wage growth", hinting that monetary stimulus is still necessary.
The euro touched an intra-day high of $1.1807 but it slipped back to 1.1750 after Draghi’s dovish remarks, losing 0.36% on the day.
The dollar index gained 0.24%, rising to 93.88 but analysts admitted that dollar investments would be muted this week given the uncertainties surrounding the US tax overhaul. Markets believe that the Senate Republicans will face challenges to pass the tax bill when they return after a week off for the Thanksgiving holidays. Dollar/yen was up 0.21% to 112.30 and dollar/swissie jumped by 0.38% to 0.9923. Dollar/loonie rose by 0.27% to 1.2795.
The dollar-denominated gold extended its losses, falling by 0.65% to $1,285.90 per ounce.
The pound remained 0.24% up on the day, supported by expectations that the UK cabinet will back an increase in the Brexit divorce bill under certain conditions. Particularly, ministers predict that the offer could rise from the current 20 billion euros to 40 billion euros approaching the EU’s estimate of 60 billion euros. Besides that, the EU Brexit negotiator, Michel Barnier, stated on Monday that the EU was willing to give Britain "its most ambitious trade deal" but only if it meets EU demands.
In other currencies, the aussie was weaker by 0.24% at $0.7547 ahead of the RBA monetary policy meeting minutes release early on Tuesday. Note, that RBA policymakers decided in October to hold interest rates at a record low level of 1.50% as expected, retaining their optimism on country’s economic outlook.
The kiwi stood flat at $0.6816.
Looking at energy markets, oil prices retreated sharply on Monday as investors turned cautious ahead of next week’s OPEC meeting where OPEC and non-OPEC members will discuss whether to keep restraining oil supply after the current deal expires in March 2018. Investors are widely anticipating that the deal will be extended until the end of 2018 but doubts are still growing about Russia’s commitment. WTI declined by 1.57% to $55.66 per barrel and Brent fell by 1.79% to $61.60.
