The main source of volatility in the foreign exchange markets on Wednesday was the euro, which faced significant problems ahead of today’s decision on interest rates from the European Central Bank.
It is increasingly expected that the Bank will take a dovish stance when it meets later today, and developments on Wednesday appeared to confirm that this was likely.
Perceptions that a rate cut or at least some sort of stimulus package was on the cards was exacerbated on Wednesday after a data release from the manufacturing industry in the bloc’s largest economy, Germany, showed that there had been a significant slowdown. In fact, the data showed that the sector had shrunk at its speediest pace for seven years.
At one stage, the euro reached its worst position in the EUR/USD pair for almost two months, reaching $1.11270.
However, it later rebounded in the currency markets and reached $1.11350 in this particular pair. The euro looks set to end the month on a 2% overall dip.
There was some surprising performance for the pound during the trading day on Wednesday and into Thursday.
The appointment of Boris Johnson to the country’s Prime Minister post was originally met with fear by the markets, given Johnson’s stated desire to take Britain out of the European Union by October 31st even if there is no deal in place.
This desire was reiterated by Johnson yesterday, but overall it appeared that the markets were relatively satisfied with his appointment – perhaps because it represents a rare moment of political stability in Britain, which has been beset by fighting over Brexit for several years now.
The pound was recorded at $1.2472 in the GBP/USD pair, which represented a welcome rise from the position of $1.2382 which it saw last week following early question marks over what sort of Brexit policy Johnson was likely to pursue as Prime Minister.
Over the Atlantic, the dollar seemed able to fend off concerns about a dovish stance from the Federal Reserve next week. In its pair with the Japanese yen, the dollar saw a position of $1.2382, which was close to a seven-day high for the currency.
The US dollar index, which monitors the performance of the dollar by calculating how it is doing in proportion to several other global currencies including the euro, was at 97.725 as trading ended. Over the course of Wednesday, it saw its best position for two months or so and reached 97.810.
The dollar’s relatively strong performance came in large part from a claim by a senior US government official that the dollar is a key tool in its arsenal.
Steven Mnuchin, who serves as the US Treasury Secretary, told the news network CNBC that the dollar’s position as the global reserve currency buoyed the government.
While this analysis was already known among many traders, hearing it repeats by such a senior official acted as a vote of confidence in what can sometimes be a volatile trading landscape.