The euro edged higher on Thursday, driven by reports about UK Prime Minister Theresa May winning cabinet approval for her draft Brexit plan, although uncertainty over whether the agreement will secure parliamentary approval kept gains in check.
Against the US dollar, the euro rose 0.07 percent to 1.1318, while the sterling fell 1.2 percent to 1.2828 after marking a high of 1.3071 in the previous session.
Head of currency strategy Ray Attrill stated that getting the draft approved by the parliament will be extremely challenging and that is why gains of the sterling are capped at 1.3. It is unclear when that vote will occur.
With the British Prime Minister winning the support of her Cabinet for a European Union (EU) divorce deal on Wednesday, the euro and sterling climbed 0.8 percent and 1.2 percent against the greenback, respectively, from their intraday lows hit on Monday.
The draft Brexit accord with the EU sealed on Tuesday would allow the UK to depart from the bloc with an arrangement that prevents a hard Brexit outcome. However, EU chief negotiator Michel Barnier warned that a smooth UK exit is still a long way to go and potentially difficult.
Further gains are also expected to be limited as traders are reluctant to place bullish bets, following Italy’s resubmission of its draft 2019 budget to the European Commission.
Italy’s growth and deficit assumptions in the plan were similar to the draft rejected for breaching EU policies, which aggravates its dispute with the EU over its fiscal policy.
US Dollar Steady but Remains Off a 16-month Peak
The US dollar held firm against a currency basket on Thursday, but remained below its 16-month high reached on Monday.
The US dollar index, a measure of the greenback’s strength against a basket peers, added 0.2 percent to $96.93.
Gains in the euro and pound have caused the recent correction in the dollar index. The two currencies, together, account for about 70 percent of the weight in the index.
Against the yen, the dollar shed 0.2 percent to 113.37. The safe-haven currency had surged in the past two sessions against the greenback, but investors still see the dollar as the more preferred flight-to-safety currency over the yen and the Swiss Franc.
Chief currency strategist Adam Cole believes a key factor pushing the pair higher is the emergence of ready buyers on declines in the form of domestic investors purchasing unhedged US bonds and taking hedges off existing holdings.
Still, analysts see strong support for the dollar despite the euro’s and sterling’s outperformance over the greenback and amid worries over Brexit and global trade tensions.
Attrill also said the dollar’s fundamentals remain firm due to a strong US economy and growing wage pressures which will keep the Federal Reserve on track for further rate hikes.
A rate hike in December is fully priced in and the next lift-off in rates will most likely be in March next year, which is likely to support the dollar, according to Attrill.
Fed Chair Jerome Powell expressed optimism in the US economy on Wednesday, stating that markets will have to get used to the idea that the central bank could raise rate at any time starting next year.
Meanwhile, a better-than-expected job data helped the Australian dollar advanced by 0.6 percent to 0.7281 against its US counterpart on Thursday.