LONDON (Reuters) – The euro briefly rallied on Thursday after Britain and the European Union agreed in principle to a text setting out their future relationship before a summit on Sunday.
European Council President Donald Tusk said the text had been discussed by British Prime Minister Theresa May and European Commission President Jean-Claude Juncker and they plan to have a close trading relationship on goods.
The single currency rose as much as 0.4 percent on the news, hitting a day’s high of $1.1434 before trimming gains to stand at 1630 GMT up 0.2 percent on the day at $1.1403. Sterling GBP=D3 also briefly surged more than one percent to $1.2928. [GBP/]
“This is encouraging news from an investor perspective as it gives some much needed clarity to investors and companies on both sides but unless political support is garnered, these gains may not be sustained,” said Jane Foley, a senior FX strategist at Rabobank based in London.
The euro’s bounce against the dollar rippled through other currencies, with the single currency rising half a percent against the Norwegian crown EURNOK= and a quarter of a percent versus the Swiss franc EURCHF=.
However, gains were limited with U.S. markets shut for the Thanksgiving holiday and after European Central Bank minutes showed policymakers stressed at their meeting in October the need to reaffirm plans to dial back monetary stimulus, even as some saw growing risks to the economy.
The euro’s gains stood in contrast to the weakness of the dollar, which slipped for a second consecutive day.
Against a basket of other currencies .DXY, the dollar fell 0.2 percent to 96.53, retreating further away from a near 1 1/2- year high of 97.693 hit earlier this month.
The latest bout of dollar weakness comes as investors start to question how many times the Federal Reserve can raise interest rates in 2019 without risking a slowdown in the U.S. economy, which has held up so far as borrowing costs have risen.
According to a Reuters poll on Tuesday, the median analyst forecast is for three more increases next year, taking the federal funds rate to 3.00 to 3.25 percent by the end of 2019. However, the third rate rise is a close call.
The poll also showed economists now put the probability of a U.S. recession in the next two years at a median 35 percent.
Money market expectations are for another 53 basis points of rate hikes through October 2019 by the Federal Reserve though dovish comments this month by Richard Clarida, the newly appointed vice chair of the Federal Reserve, have raised concerns.
A series of rate hikes and strong U.S. data have lifted the dollar this year, against broad market expectations, putting it on track for its biggest annual rise in three years but the near term outlook is becoming increasingly neutral.
“We are at an interesting point in terms of the outlook for the dollar,” said Rabobank’s Foley.
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