This week is turning out to be something of a waiting game for FX markets, given the swathe of UK events scheduled for Thursday and Friday’s payrolls data in the US. Ahead of that, we’ve seen the latest PMI data from China come in slightly better than expected overnight, with this helping a better tone to Asian stocks and also underpinning the better tone to the Aussie gained in the wake of the interest rate decision yesterday. AUDUSD is challenging the 0.7220 level, but struggling to hold above it for the time being. Sterling will be focused on the services PMI data today, which has been falling for the prior four months and given the extent of the turn-around seen in the manufacturing data earlier in the week, the market expects 54.5 (from 53.3). The point in the UK is the long time until which a hike is fully priced in, which is currently fully priced for October of next year. It’s this which is most vulnerable tomorrow should the Inflation Report come out with a more hawkish tint, which would be supportive for sterling. EURGBP has been pretty relentless recently in its move lower, which could be enhanced in this scenario, pushing the cross back towards the 0.70 level. We also see trade balance and ISM data in the US today, with the latter seen steady on the final services measure. Overall, the market is still pricing nearly 50:50 chance of a Fed hike mid-December, so we’re going to see the dollar become increasingly sensitive to data releases as this meeting draws ever nearer.
On a relatively tight overnight session on the majors, the Aussie is the standout having risen in the wake of the steady rate decision from the RBA. Surveys of institutions suggested a reasonable risk of an easing, but the RBA kept rates at 2%, with the statement suggesting a slight improvement in the outlook for the economy. The view is that the current accommodative level of rates is appropriate and there were no changes to the comments on the currency. The price action on the Aussie over the past few weeks suggests that it is more comfortable forming a base above the 0.70 level, with only the kiwi having outpaced the Aussie since the previous push below 0.70 on AUDUSD seen at the end of September. Overall, the sense is that the RBA are not in a hurry to cut rates further, indeed if a further cut is seen. In Europe, there were some better final PMI numbers yesterday to give the euro some marginal support, with a notably stronger print in the UK giving a boost to the pound which proved to be transitory against both the dollar and euro. The focus remains on Thursday’s policy meeting and the reaction of the MPC to some of the softer data of late (yesterday’s PMI aside). Key data releases are few and far between today, leaving FX majors to trade more from levels and sentiment in the wider financial sphere, where the bullish tone to equities seen last month (especially in the US) was further enhanced yesterday, the S&P closing above the 2100 level for the first time since mid-August.
The early volatility in FX markets is with the Turkish Lira, which has rallied up to 5% in early trading on the back of the weekend election results, which saw President Erdogan’s grip on power strengthened by the return to majority of his party that was lost 5 months ago. A period of prolonged political uncertainty has come to an end, hence the strong rally of the Turkish Lira, briefly back below 2.80 on USDTRY, a level not seen since mid-August. This rally should not blind us to the underlying issues in Turkey, such as the continued current account deficit which is causing underlying pressure on the currency as the market continues to fear the first Fed rate hike. We start a new month which seen the Fed rate hike question as open as ever, with current market pricing suggesting a 50% chance of a move at the December meeting. That said, the dollar has lost most of the gains seen in the wake of the Fed meeting of last week, around 75% unwound on the dollar index. Overall, the pricing on the Fed is set to keep the dollar on the choppy side through the month. The ECB President is also set to keep the market on its toes, with his latest comments in the Italian press suggesting that the December meeting was an “open question” with regards to further stimulus. For today, we have final PMI data in the Eurozone, together with manufacturing numbers in the UK and also US ISM numbers this afternoon. The BoE decision comes on Thursday of this week, with US jobs numbers on Friday, suggesting that volatility on the majors is more likely to come towards the latter half of the week.
Yesterday’s US GDP data complimented the weaker than expected UK GDP figure from earlier in the week giving yet another piece of evidence of slowing growth. The dollar didn’t react much to the softer numbers as normally you would expect a sell off after such a release, but Wednesday’s FOMC statement remains firmly in the mind of investors and we’ve seen the probability of a rate rise in November increase a little. With growth lower the focus on inflation will increase into year end and we saw the BOJ overnight delay their 2% inflation target by six months to the second half of 2016. The Yen weakened initially with USDJPY moving up to 121.50 but since has retraced back to 120.75 at the time of writing. Being the last day of trading for October There could be some volatility today which we’ve already seen in USDJPY. Next week is a very busy one for the economic calendar with manufacturing and services surveys from both sides of the Atlantic, the Bank of England Inflation Report and then a nonfarm payrolls finale.
Markets interpreted last night’s FOMC statement as an admission that a December rate hike is still very much a possibility allowing the dollar to bounce and overnight Asian equities have weakened meaning a softer open for indices is expected in Europe. On the back of the statement EURUSD fell sharply taking it back below 1.1000 for the first time since September and this morning it trades at 1.0940 with the next major support seen at 1.0800, where if we see a break below we are likely to see an increase in calls for parity. Between now and year end makes the economic data all the more important as to whether the Fed does actually commence tightening in December and we see the penultimate nonfarm payroll of 2015 next Friday where a figure of 177k is expected, still less than the desired 200k, but up from September’s 142k. As we discussed in yesterday’s note inflation is still a big worry for the Fed and whether in two years time it will be back towards their target as interest rates are on the rise. On balance I still don’t expect a rate hike from the Fed this year. Today sees business and consumer sentiment from the Eurozone where a weak reading could put further pressure on EURUSD, but the main focus is US GDP data released at 12.30 GMT. Overnight the an interest rate decision from the BOJ could also provide some volatility ahead of tomorrow’s last session of the month.
Further evidence yesterday suggested that central bank hawks are likely to remain in the minority following weaker than expected data from both sides of the Atlantic with UK GDP and US consumer confidence that both disappointed. Overnight the Aussie has taken a nose dive following a much weaker than expected inflation release and once again we see the tumble in oil prices applying further deflationary pressure around the globe. The current inflation issue is causing a dilemma for central banks and making their job of setting monetary policy by looking two years down the line very difficult. For a number of months inflation had expected to pick up following the slump in commodity prices that commenced a year ago, however there’s been no indication of that just yet and as a result central banks remain welded to accommodative mode rather than tightening, as evidenced most recently by the ECB. This is why today’s focus will be on the outlook for US inflation at this evening’s FOMC rate decision and in particular the emphasis they put on deflationary pressures from external factors. Depending on what they say later this could be the final nail in the coffin for any chance of a 2015 rate hike. Note also soon after the FOMC that the RBNZ is expected to keep rates on hold and maintain a very dovish tone.
Today’s sees the first reading of Q3 GDP data in the UK and it is expected to dip to 0.6% from 0.7% in Q2. Recent manufacturing surveys have indicated that the sector is slowing and despite manufacturing making up only 10% of the UK economy, the pace of deceleration is starting to become a concern. The services sector, making up the vast proportion of the UK economy, has also seen survey data rapidly declining in the past three months and at the same time consumer confidence has dipped recently, a critical ingredient to the success of services. Today’s expected dip in growth will come as little surprise especially since the Eurozone recovery is struggling to gain traction, meaning UK the manufacturing and services sectors will continue to find the going tough. But a major concern for the BOE is the reemergence of a deflationary environment. With the exception of September’s 0.2% rise in month-on-month inflation the UK would officially be in a deflationary environment following negative readings in August and October. Sterling could come under pressure this morning especially if the GDP number is lower than expected. Later today there’s a raft of US data with durable goods, then the Markit services survey and finally consumer confidence expected to dip slightly and this release can often move the dollar.
Most central banks around the world have interest rates near to or even below zero with many still firmly in an easing cycle. The ECB and PBOC sent risk assets higher last week with both their words and actions as the markets are now expecting not only the Federal Reserve to keep rates on hold this December, but the ECB to loosen monetary policy even further. With evidence globally that shows growth is either slowing or struggling to gain any traction we could see central bank largesse continue. A big week for the markets with a very busy economic calendar that includes the release of UK and US GDP data as well as the Federal Reserve’s October interest rate meeting on Wednesday. US consumer confidence on Tuesday is also noteworthy and is expected to dip a little from its multi-year highs. The week kicks off with German IFO data this morning which is expected to dip from August to September and then later this today US new home sales are released. All eyes remain heavily focused on economic data and with an FOMC decision volatility could pick up this week.
ECB President Mario Draghi maintained his reputation of moving markets without actually doing anything in the wake of yesterday’s ECB policy meeting. His openness towards further easing was the main factor pushing down the single currency and away from the 1.15 level which has caused previous pain for the central bank. But it wasn’t an explicit promise to do more, rather a pledge to re-examine at the early December meeting, in part on the back of the downside risks from emerging market strains. This takes EURUSD back down to levels last seen two months ago. There was also the follow-through on USDJPY (above 120.00), together with the downward pressure on cable, back below the 1.54 level. Equities also lapped up the news, with the Euro Stoxx 50 index up 2.5%. This could make for a long few weeks as investors look towards the early December meeting. As we mentioned before, one thing is the intention, the other is the delivery and on that point, there is more debate to be had on exactly what the ECB can deliver at this point in terms of QE, given the constraints they are already facing in buying bonds. For today, there is an early focus on provisional PMI data for October in the Eurozone, where early indications for France suggest some slightly better numbers. No key US data today, although note that Canadian CPI data is releases at 12:30 GMT.
For the past four sessions, EURUSD has been confined to the 1.13 handle throughout the trading sessions, another illustration of the falling volatility we’ve seen over the recent times. It would be hard to see this continuing today, with the ECB meeting taking place. The chances of further policy measures look to be slim at this point in time. Their quarterly survey of the credit conditions this week suggested that lending conditions were improving, but there remain concerns regarding the pace of recovery and continued low or negative inflation. The two primary reasons for not expecting any action today are the fact that we’ve not had strong hints from the central bank and also the options need to be explored, because simply buying more bonds on a monthly basis is not an easy option for them to enact. As such, and given the level of the currency (helped by the weakness of the dollar), the market will be listening closely for any comments around the currency, given the proximity of the 1.15 level around which the ECB has tended to look a little more closely. The press conference starts at 12:30 GMT today. Leaving the ECB aside, we have retail sales data in the UK, released at 08:30 GMT, where 0.4% gain on the headline measure is expected. There is also the weekly claims data in the US and Existing Home Sales data at 14:00 GMT. EURJPY still worth watching ahead of the ECB, sitting above trendline support which currently comes in at 135.48.