While we have seen some fall off in trading volumes this month, it certainly hasn’t been void of dominant themes and the weaker USD continues to be one of our top points of focus. Overnight the USD index dropped to fresh 14 month lows following dovish FOMC minutes. The primary point from the minutes suggested inflation will remain below the target 2%, a level it has failed to achieve in over 5 years and thus diminishes expectations for additional rate hikes from the FOMC. This is just one issue in the weaker USD story, political concerns around the administration have resulted in a lack of action on the policy front, notably health and tax plans, thus played into some downgraded expectations of US growth.
Broadly speaking markets have carried positive sentiment through earnings season as over 80% have beat expectations thus far in the US, where indices continue to press fresh highs with all three major indices once more posting record intraday levels. Even in Europe where markets have shown a little more downside volatility this month, trading slightly lower vs the continuous grind higher in the US, markets were lifted by surging fuel prices which left oil trading around 8 week highs.
Overnight sentiment found itself well supported again while European markets have had a broadly firmer start with the exception of a slightly weaker DAX. EURUSD has traded at 1.1777 to 31 month highs and we have seen plenty of Euro sellers taking advantage of the press higher, 1.1714 was the 2015 high and we now sit just above that key level. GBPUSD also looked to press highs on the back of the weaker USD, trading to 9 month highs at 1.3157.
It’s been a mixed bag for GBP in recent months, fresh 9 month highs vs a weaker USD, but struggling around post Brexit highs against a firmer Euro. Yesterday’s GDP print, while not exactly providing the pound with a lift, confirmed GDP at 1.7% as expected, albeit down from 2% and confirming the slowdown in the UK economy through Q2. This is only the preliminary reading however and we’d almost certainly expected some revision as data filters through. For the pound to gain any traction against the Euro we will need to see the ECB confirm that they are extending their QE program beyond the December deadline. The market’s reaction to this move will be telling, Euro has been positioning itself for a tapering of purchases, however if that includes an expansion of the program remains to be seen. EURGBP still finds sellers above .8950. .8905 which provides light support, with .8745/65 area offering real support to the downside.
It’s a quiet European calendar today and attention will turn to the US session for action. Markets interpretation is that the Fed are currently at the mature stage of the tightening policy, for now at least. Markets feel that given inflation expectations are to remain below target, the Fed are unlikely to be pressing the rate hike issue into the year end, especially while they are now also looking at offloading some of their balance sheet. That aside, our focus will be back to data and Durable goods orders and trade balance data will headline the US session. Both are expected to show improvements so may provide the USD with some respite, however a significant shift in data will be required in coming months if the greenback is to end the bear run. EURUSD support now around 1.1630 should hold moves lower, while rallies towards the highs below 1.1780 will be the first retest higher.