News & Analysis

Euro becomes overall underdog as US Dollar joins Pound in battle for supremacy

Andrew Saks, Thursday, 25 November 2021

It would be very understandable to draw the conclusion that the FX market has been very much overlooked by trades, analysts and market makers during the course of this year.

Given the tremendous volatility that has taken place in the stock and commodities markets, driven by unprecedented circumstances which include government-enforced lockdowns which have decimated small to medium sized businesses and curtailed the revenues of firms that rely on customer footfall whilst many blue chip publicly listed multi-nationals have romped home with the profits, the currency markets have remained in the shadow.

This is largely because volatility is the lifeblood of the electronically traded markets, and a welcome return to volatility among physical commodities such as oil and gas, as well as within the publicly listed stocks due to new phenomena such as SPAC listings of new technology firms, a series of high value takeovers and the adverse effect of supply chain woes has been the tone of the year.

Major currency pairs have long been in the doldrums, with very little movement however that is beginning to change and traders are beginning to look at the currency markets as an asset class that is beginning to liven up for the first time in a very long time.

Yesterday, the Euro reached its lowest value against the British Pound in almost two years, largely driven by the concerns over the potential effect on the mainland European economy as the governments in some of the member states with significant economic power begin to rather predictably enforce lockdowns, whilst the United Kingdom remains totally free.

It would not take the knowledge of an Economics Professor to work out that if a region which has one sovereign currency as the mainstay of its economy inflicts lockdowns on its public and its business community and the other doesn't then there is going to be an upsurge in the currency of the nation that remains free and a huge amount of concern relating to the one that doesn't.

But that's yesterday's news. Big news, but yesterday's nonetheless.

Today, however, brings another dimension into the same movement, as the US Dollar has risen considerably against the Euro, making the Euro the distinct underdog when it comes to the world's three most traded major currencies this week.

In fact, the Deutsche Bank Currency Volatility Index (CVI) has demonstrated the level of volatility within the major currencies by going from a three-month low to showing the highest levels of volatility since March in yesterday's analysis. Deutsche Bank is the world's second largest Tier 1 interbank foreign exchange dealer by market share at 12.19% of global order flow.

Speculation as to why the US Dollar moved against the Euro is variable, however it is clear that the US Federal Reserve's intention to scale back its bond buying campaign, therefore indicating that the US economy is moving forward, whilst comparing it against the debilitating lockdowns of some of the key regions in Central and Western Europe.

With business as usual in the Anglosphere and trepidation in the Eurozone, many financial markets giants have begun to realize that a move to London is a pragmatic one, including Shell Oils which is exiting its homeland in Holland and setting up in London, a move that is clearly all about being in the world's financial markets trading capital, and not about its raw material end product.

Opinions vary tremendously on whether Brexit was a sensible idea or not, however right now, it is likely that British businesses and investors will be breathing a sigh of relief and watching the economy eclipse that of the mainland.

Share article