The U.S. dollar strengthened as the euro and British pound slipped on Thursday following a policy update by the European Central Bank that underlined political risks in Europe.
The ECB left interest rates unchanged on Thursday. The central bank’s asset purchasing program is set to wind down in December, ahead of a first expected interest rate increase next year.
The euro EURUSD, -0.1755% slipped to a fresh lowest level in more than two months following the update, last buying $1.1382, compared with $1.1394 late Wednesday in New York. The British pound GBPUSD, -0.4425% also touched its lowest since August, buying $1.2817, versus $1.2881 Wednesday.
“Euro bears have control of the market,” said Viraj Patel, FX strategist at ING. “There was some risk of hawkish words from the ECB, but we saw none of that.”
Ahead of the policy statement, Boris Schlossberg, managing director of FX strategy at BK Asset Management wrote Draghi “clearly prefers to ignore the brewing political risk and focus solely on monetary and economic growth.”
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The short-euro position was so compelling at the moment because of the heightened political risk around the likes of Brexit and Italy’s budget, Patel added. “The short-term risk is just about politics,” he said.
During the Q&A, ECB President Mario Draghi said he was confident that a “good, common-sense” solution to Brexit would minimize financial stability risks. The inverse of his statement, implied that the potential of a ‘no-deal’ Brexit was a threat to financial stability, though whether the comment alone drove sterling and the euro lower was questionable, according to Patel.
Draghi: If the lack of solutions in the negotiations around Brexit continues and remains as the end date gets closer, the private sector itself will have to prepare for a hard Brexit… I would not call it a big financial stability risk, but financial uneasiness
— European Central Bank (@ecb) October 25, 2018
Earlier Thursday, U.K. Brexit Secretary Dominic Raab said there was a risk of a “no-deal” Brexit due to the European Union’s stern negotiating stance.
Immediate concerns over a possible no-confidence vote for Prime Minister Theresa May appeared to have been alleviated somewhat after she met with backbenchers from her party — members of parliament who don’t hold governmental office — on Wednesday, market participants said.
The U.S. dollar benefited from the weakness in its major rivals, and the popular ICE U.S. Dollar Index DXY, +0.28% which measures the greenback against six rivals and is most heavily weighted toward the euro, was up 0.2% at 96.617 — a 10-week high.
For the week, the dollar gauge is on track for a 0.9% jump, according to FactSet data.
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