Focus Turns to Europe Ahead of Big Brexit Meeting; Stay Long Euros; Krona Revived

All eyes on Wednesday will be on the meeting between EU leaders and British Prime Minister Theresa May in Brussels, at which some still hope a Brexit deal might be struck. Expect volatility in sterling and euro rates throughout the evening. Meanwhile, the Swedish krona continues to outperform in Europe on expectations for tighter Riksbank policy.

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For European G10 FX, by far the most important news of the week comes on Wednesday from Brussels, where British Prime Minister Theresa May meets EU leaders for crucial Brexit negotiations.

With the UK and EU still at loggerheads over the Irish border and with the likes of European Council President Donald Tusk admitting to holding “no grounds for optimism,” it is no wonder that the British pound is little changed (slightly down) over the past five days, in the mid-$1.31s.

The euro, too, has struggled with Brexit talks on the horizon, but it has at least bettered the pound and a weak US dollar, with a marginal rise over the five-day period from $1.15 to $1.156.

There is a sense on Wednesday of the calm build-up before a storm. Foreign exchange traders will do little prior to the evening’s announcements (events kick off at 6pm local time), evident from a muted market response to the day’s UK inflation data, which came in well under expectations.

UK inflation for the year to September fell to 2.4 percent, the ONS announced, from 2.7 percent in August. Sterling, though, lost only 0.25 percent of its value in the hour following the data’s release.

Sticking to its guns in the face of Brexit, at least as far as the euro is concerned, is the team at Crédit Agricole. On Tuesday, CA advised investors to “remain long” the euro on grounds that “many negatives in terms of politics are [already] in the price”; it targets a 3.3 percent higher EUR/USD rate of $1.195.

Of late, showing the euro and pound how it’s done are the Scandinavian currencies.

Since Thursday’s announcement of above-forecast Swedish inflation (now at an annualized 2.5 percent), the Swedish krona has gained more than 2 percent to a rate of 8.9 krona to the dollar, and further strength is anticipated as investors continue to adjust positions to reflect the increased likelihood of the Riksbank raising interest rates in December.

In a recent survey of FX professionals by SEB, predictions for USD/SEK in June 2019 were as low as 7.6, indicating a potential 17 percent increase in the krona’s buying power.

Like its Scandinavian cousin, the Norwegian krone is looking lively, and for similar reasons.

Last week’s solid Norwegian inflation data cemented expectations for a further interest rate hike by the Norges Bank within the coming months. In September, Norwegian rates were raised for the first time since 2011. The krone is 1.5 percent higher since last week’s data at 8.155 to the dollar.

“Market pricing of Norges Bank [rate hikes] remains too soft,” wrote Danske Bank on Tuesday. The bank sees the krone 4 percent higher next year.


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