Upbeat economic sentiment data from Germany buoyed the euro on Tuesday, while muted trade in the G10 group of currencies left Britain’s pound the biggest mover as Brexit talks went down to the wire.
German investor sentiment soared more than expected in December on expectations that vaccines against the coronavirus would boost the outlook for Europe’s largest economy, a survey showed.
The ZEW economic research institute said its survey of investors’ economic sentiment moved up to 55.0 from 39.0 in the previous month. A Reuters poll had forecast a reading of 45.5.
The data helped the euro stay higher to the dollar, although third-quarter gross domestic product figures for the euro zone were revised. The euro last traded 0.04% higher to the dollar at $1.2112. The dollar traded about flat against a basket of currencies.
The big mover was sterling, which sank against both the dollar and the euro as caution grew among investors awaiting the outcome of Brexit trade-deal talks.
With only three weeks to go for Britain to fully complete its exit from the European Union, leaders have failed to narrow differences on a post-Brexit trade deal.
Against the dollar, the pound was 0.4% lower at $1.3330 by 1147 GMT. It was also 0.4% lower against the euro at 90.88 pence.
“It’s a completely headline-driven price action, which is very tricky to handle as an investor,” said Andreas Steno Larsen, chief global strategist at Nordea.
“The market base case is clearly still a (slim) trade deal when judged from prediction and betting markets. No one really dares to call the no deal with WTO-tariffs scenario ... we could still have a grim trading period ahead for the GBP if negotiations break down.”
Investors pushed sterling more than two cents lower against the dollar on Monday after British Prime Minister Boris Johnson said he would travel to Brussels this week for what may be a last chance to secure a trade deal. The pound regained some of that ground on Tuesday but still traded on the defensive.
Implied volatility on the pound - a measure of expected future swings in the currency - hit eight-month highs, a sign that traders were preparing for gyrations.
“The fact that Johnson will travel to meet [European Commission President Ursula] von der Leyen later this week means that all is not lost with respect to a deal,” said Rabobank head of FX strategy Jane Foley.
“However, given that the issues of fisheries and a level playing field have been in the spotlight for so long, it may be a bit of a long shot to expect that they can suddenly find a new angle to compromise on.”
Reporting by Ritvik Carvalho; additional reporting by Joice Alves, Kevin Buckland in Tokyo, Tom Westbrook in Singapore; editing by Ed Osmond, Larry King