Euro bounces but Italy, Brexit test nerves

LONDON: The euro edged up from a 16-month low on Tuesday as some investors consolidated positions but concerns about Italy's budget proposals, poor German data and Brexit negotiations sapped broad appetite for the single currency.

While long dollar bets remain among the most crowded trades in the foreign exchange markets, the euro has been pegged back by a series of negative headlines about the European economy, which is struggling to gain momentum.

"The euro's drop below the $1.13 line surprised some investors and the latest headlines from Italy and Brussels has hardly been conducive for euro bulls," said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets in London.

Against the dollar, the euro edged 0.3 percent higher at $1.1229, above a June 2017 low of $1.1216. It has fallen nearly seven percent so far this year, more than halving its gains from last year.

Tuesday is the deadline for Italy to resubmit its budget proposals to the European Union after a showdown between Rome and Brussels over the government's spending plans that has rattled bond markets and weighed on the single currency.

The progress of Brexit talks with the European Union has been another source of uncertainty for the euro and the British pound. British Prime Minister Theresa May said on Monday that there were still considerable unresolved issues as the two sides approached the "endgame" in negotiations for Britain's departure from the bloc.

Officials have warned that unless there is dramatic progress by the end of Wednesday there is unlikely to be a summit this month to approve a Brexit deal.

"The euro will remain under pressure as the Italian situation and headlines over the progress of Brexit negotiations will give enough food for thought for currency traders," said Morten Helt, a senior FX strategist at Danske Bank.

An overnight rally in the dollar stalled, with the greenback edging slightly lower to 97.628 against its an index of its rivals . It had hit 97.70 in the previous session, its highest since June 2017.

Hedge funds have resumed shorting the euro in recent weeks as expectations of a diverging trend in economic growth, and consequently interest rates have encouraged investors to borrow euros and invest the proceeds in U.S. dollars.

The U.S. Federal Reserve is set to raise rates by 25 basis points in December, with two more hikes to follow by mid-2019 as wage pressures build in a booming economy, while the European Central Bank plans to end its bond purchase plan by end-2018.

The Japanese yen traded at 113.99 on Tuesday, as the greenback gained 0.1 percent versus the yen. The yen touched a six-week low of 114.20 on Monday.

Analysts believe the yen will strengthen if global risk sentiment worsens, thanks to its safe-haven status.