FX Focus: Dollar hits nine-month high against euro as pound continues to climb

The pound struggled for direction on Monday (14 November), while the dollar rallied with investors buoyed by increasing expectations the US Federal Reserve could raise interest rates as early as next month.

Having soared to a five-week high against the dollar on Friday, sterling retreated 0.57% against the US currency to trade at $1.2519 by mid-afternoon in the first session of the week. However, the pound extended gains against the euro, climbing 0.25% to €1.1633, after hitting a seven-week high of €1.1669 against the common currency late last week.

Elsewhere, the dollar rallied, hitting €1.077 against the euro, its highest level in nine months, as the post US-elections jitters continue to subside.

The greenback was also firmly on the front foot against the yen, gaining 1.15% to ¥107.88 and was broadly stable against its Canadian and Australian counterparts, exchanging hands at CAD$1.3541 and AUD$1.3524 respectively.

"The message we've had so far is that [Donald] Trump's policies will stimulate growth and inflation which has driven Treasury yields to their highest level since the start of the year," said Oanda's senior market analyst Craig Erlam.

"The dollar has responded in kind, rallying strongly, particularly against the safe haven yen which has dramatically lost its appeal having been a favourite in the immediate aftermath of the election."

After the initial shock triggered by Trump's surprise victory, the dollar has been boosted by rising expectations the Fed would hike interest rates next month as originally expected before the US elections.

However, currency markets could be very volatile this week as investors will focus on three key central bank speakers over the coming days. Bank of England Governor Mark Carney kicks off the proceedings with his testimony to the Treasury Select Committee on Tuesday, while Fed Chair Janet Yellen's will speak to the Joint Economic Committee on Thursday and European Central Bank President Mario Draghi will deliver a speech at the European Banking Congress on Friday.

In the aftermath of the US elections, Yellen's words are likely to be closely monitored by investors, who are looking to shed light on the US central bank's strategy.

"Trump's shock victory swiftly sparked speculations of the European Central Bank extending its quantitative easing program at December's meeting, consequently leaving the euro vulnerable to losses," said FXTM research analyst Lukman Otunuga.

"The mixture of euro weakness and dollar strength has made this pair attractive to sellers with further declines expected as expectations heighten over the Fed raising US rates before year end."