The cumulative difficulties in Europe, with the risk of a “hard” Brexit, the tensions on the Italian budget and the social crisis in France, dominated the currency markets on Tuesday.
The pound continued to fall as Theresa May tried to renegotiate the draft Brexit deal she had negotiated with the EU in November. Faced with the hostility of British MPs, the Prime Minister had to postpone a crucial vote on her Brexit deal, which was scheduled for Tuesday. In the evening, the pound was down 0.33% to $1.2525, bringing its decline to 2% in three sessions. The British currency has returned to its lowest level since April 2017, and has dropped about 14% since the Brexit referendum in June 2016.
For its part, the dollar index, which measures dollar against a basket of 6 reference currencies (euro, yen, Swiss franc, pound sterling, Canadian dollar and Swedish krona) rose by 0.22% to 97.43 points on the ICE market.
The greenback rose after the publication of a much higher than expected producer price index (PPI) in November in the United States, which could prompt the Fed to continue its rate hikes. The PPI rose 0.1% on a month, while the consensus was for price stability after a gain of 0.6% in October. On a year-over-year basis, the index climbed 2.5% and even 2.7% excluding food and energy (vs. + 2.9% and + 2.6% respectively, a month earlier).
The movement of “Yellow Vests” begins to weigh on the euro.
Conversely, the euro lost 0.34% to $1.1316, on expectations of a postponement by the ECB of its timetable for raising key rates, given the economic slowdown that is confirmed in the Eurozone. In Germany, the ZEW index of business confidence remained in negative territory in December, even though it is recovering. The index, released Tuesday, came in at -17.5 points after -24.1 in November, and against -25 consensus.
Moreover, according to some analysts, the sharp social tensions that affect France for three weeks also weigh on the price of the single European currency. President Emmanuel Macron announced Monday a series of social measures to calm the movement of “Vests yellow”, which will cost about 10 billion euros to the French state, which may increase in 2019 its public deficit over- above 3% imposed by the EU Stability Pact.
