Dollar Gains in Holiday-Thinned Trade; Sterling Hit by Brexit Woes

The dollar traded higher in early European trade Monday, while the euro was weakened by disappointing German industrial production data and sterling was weighed on by the revived risk of a messy end to the Brexit transition period at the end of the year.

At 3 AM ET (0700 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.3% at 92.957. Trade is likely to be thinned due to the U.S. Labor Day holiday.

Data from the U.S. Labor Department released on Friday showed that August’s jobless rate fell to 8.4% from 10.2%, despite government funding drying up and rising doubts about the sustainability of the U.S. economic recovery.

“The jobs data, which showed a decline in the unemployment rate, and a rise in U.S. Treasury yields, are supporting the dollar today,” Mizuho Securities chief currency strategist Masafumi Yamamito told Reuters.

EUR/USD dropped 0.1% to 1.1829, weighed by disappointing German industrial output data for July. This rose 1.2%, increasing for the third straight month, but growing by less than forecast by economists.

The region’s uncertain outlook is set to feature prominently in discussions when European Central Bank officials meet this week. Most economists predict the Governing Council will keep policy unchanged on Thursday, although they expect another increase in asset purchases before the end of the year.

“There are three important issues to watch out for at next week’s meeting. There is a fresh set of ECB projections, related to this lots of attention will be on the ECB’s reaction to the recent strengthening of the euro and finally with last week’s Fed announcement there should be interest in the ECB’s own strategy review,” said ING’s Carsten Brzeski, in a research note.

After the EUR/USD pair briefly hit 1.20 last week, “the interesting part of the meeting and the press conference will be Lagarde’s comments on the euro exchange rate,” Brzeski added. “What will count most next week is the question of whether the stronger euro has already opened the door for more monetary stimulus in the coming months.”

Elsewhere, GBP/USD dropped 0.6% to 1.3201, as the trade negotiations between Britain and the European Union threatened to turn hostile.

The Financial Times reported Monday that the U.K. government is planning new legislation that will override key parts of the Brexit Withdrawal Agreement. This would make clinching a new trade deal before the end of a status-quo transition arrangement in December very difficult.

Without a deal nearly $1 trillion in trade between Britain and the EU could be thrown into uncertainty.