Dollar down, gives up earlier gains as volatility remains

LONDON: The dollar slipped in early European trade Friday, with the euro showing strength as traders took heart from Thursday’s European Central Bank meeting. Sterling rebounded after a robust bounce in activity in July, but further losses look likely.
At 3 AM ET (0700 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.1% at 93.285, with EUR/USD up 0.2% at 1.1831.
The euro had a volatile ride during Thursday’s ECB meeting and subsequent press conference, but the overall tone Friday remains positive.
“The ECB presented almost no serious hurdles to renewed euro strength as economic forecasts were more upbeat than expected while comments on the exchange rate were fairly soft,” said analyst Petr Krpata at ING.
“Given the outlook, it is hard for ECB to lean against currency strength and with bearish USD dynamics firmly in place, the medium-term upbeat EUR/USD outlook for 2021 remains intact.”
That said, possibly to counter the impression that the bank had been unduly optimistic, the ECB’s chief economist Philip Lane wrote in a blog post on Friday that: “There is no room for complacency.”
Elsewhere, GBP/USD rose 0.2% to 1.2824, and EUR/GBP gained 0.1% to 0.9228, after Britain’s economy expanded by 6.6% in July from June, for its third month of growth as the country tries to recover from its coronavirus lockdown crash.
However, sterling remains weighed by the fraught state of negotiations with the European Union over its trading relationship after Britain fully leaves the bloc.
The pound has lost 3.6% against the dollar this week and about as much against the euro as Brexit turmoil resurfaced.
EU diplomats said the bloc could take legal action against Britain after U.K. officials presented a draft law earlier this week that would break the divorce treaty and in all likelihood end four years of Brexit talks.
“The chances of a UK-EU trade deal being struck are now 50:50 at best, given the events of the past few days, ” ING said. “The very limited risk premium factored into EUR/GBP at the moment suggests further downside lies ahead for the pound.”
Turning back to the dollar, traders will focus on the inflation figures for August, which are due at 8:30 AM ET (1230 GMT).