Euro is rising ahead of today’s ECB meeting
The Dollar Index (USD/DXY) closed lower even as US yields rose following the release of better than expected economic data. Republican Party infighting lead to uncertainty over tax legislation. Choppy trading dominated the FX markets which finished with a strong currency disconnect. Sterling soared after data showed accelerating UK growth. The Euro rallied ahead of the ECB policy meeting, the week’s big event. Australian inflation data missed expectations which saw the Aussie Dollar slide 1%. Canada’s central bank left interest rates unchanged even as they took a cautious stance when considering rate increases. The Loonie slumped to over 3 months lows. Emerging Market currencies were mostly down, led by a 2.18% drop in the South African Rand.
Australia’s Q3 Headline CPI missed with a print of 0.6% against a forecast of 0.8% while the Trimmed Means CPI came out at 0.4%, lower than the forecast of 0.5%.
German IFO Business Climate Index improved to 116.7 from 115.3 and a forecast 115.2
UK Preliminary Q3 GDP rose to 0.4%, higher than the forecast of 0.3% and previous 0.3%.
US Core Durable Goods Orders climbed to 0.7% against a forecast of 0.5%
US Durable Goods Orders rose to 2.2% from a previously revised upwards 2.0% and forecast 1.0%.
US New Home Sales were up at 667,000 units from the previous 561,000 units.
Wall Street stocks retreated after a release of mixed earnings results. The DOW closed down 0.48% before moving higher after the close. The S&P 500 ended down 0.21% at 2561.10 (2568.2 yesterday).
The yield on the US Ten Year Treasury was up 2 basis points at 2.44%. Germany’s Ten Year Bund yield close at 0.48% from 0.47% yesterday. The UK’s Ten Year Gilt yield jumped 5 basis points to 1.40%.
USD/DXY – slipped off highs to close at 93.700 (93.928 yesterday)
EUR/USD – rallies 0.35% to 1.1808 from 1.1763 yesterday.
GBP/USD – soars to finish up 0.95% at 1.3257 (1.3128 yesterday)
AUD/USD – slides to 0.7699 at the close against 0.7782 yesterday.
USD/JPY – little-changed, ends at 113.72 (113.80)
USD/CAD – jumps to 1.2800 from 1.2683 yesterday, up 1%.
Outlook: The Dollar Index (USD/DXY), which is a measure of the value of the Greenback against a basket of currencies, fell 0.25%. The Dollar’s fall was not broad-based and the currency disconnect theme emerged. In the Euro, traders took profits and adjusted positions ahead of today’s ECB policy meeting. German IFO Business Climate Index gained to a better than expected 116.7. Traders expect the ECB to announce a reduction in the size of its bond buying program. Sterling soared off its lows after Q3 GDP data showed that the British economy is expanding faster than expected. This fanned expectations for further rate increases by the Bank of England. The Euro (57.6%) and Sterling (11.9%) carry a total of 69.5% weighting in the current Dollar Index(USD/DXY).
A disappointing miss on Australian inflation data pulled the Aussie Dollar lower. The Bank of Canada’s decision to leave interest rates unchanged was expected but the cautious stance in terms of rates going forward was not. The BOC also noted that the Loonie’s strength restrained inflation and was also a risk to NAFTA negotiations. The decision of South Africa’s Finance Minister to ramp up debt to help plug the budget deficit saw the volatile SA Rand fall over 2%.
Events and economic data releases today:
German GFK Consumer Confidence Index (GMT am, Oct 26/Local Time 5 pm, Oct 26) forecast: 10.8 from 10.8
Spain September Unemployment Rate: (GMT 7 am, Oct 26/Local Time 6 pm Oct 26) forecast: 16.6% from 17.2%
RBA Assistant Governor Guy Debelle speech entitled “Uncertainty” at the Warren Hogan Memorial Lecture in Sydney: (GMT 7.45 am, Oct 26/Local Time 6.45 pm, Oct 26)
ECB Interest Rate Decision and Minimum Bid Rate (GMT 11.45 am, Oct 26/Local Time 10.45 pm, Oct 26): Current Minimum Bid Rate at 0.0% is not expected to change
ECB Monetary Policy Statement and Press Conference (GMT 12.30 pm, Oct 26/Local Time 11.30 pm, Oct 26)
US Weekly Unemployment Claims: (GMT 12.30 pm, Oct 26/Local Time 11.30 pm, Oct 26) forecast: 235K from 222K
US September Pending Home Sales: (GMT 2 pm, Oct 26/Local Time 1 am, Oct 27) forecast: 0.2% from -2.6%
Trading View: Expect the currency disconnect theme to continue with the US Dollar maintaining its firm stance. Traders will continue to watch for developments regarding the next Fed Chair as well as Republican party infighting which will affect Trump’s tax legislation efforts. One of the candidates Gary Cohn has been ruled out as Trump needs him to attend to tax reform. Fox news announced that Trump is considering keeping Janet Yellen as Fed Chair.
The ECB policy meeting is the week’s big event. Traders have discounted an announcement of a reduction in the size of the ECB’sbond buying program. US yields will continue to be a support pillar as the Dollar consolidates its gains.
EUR/USD – rallied off the lows at 1.1753 yesterday, closing in New York at 1.1810. EUR/USD has immediate resistance at 1.1820 (overnight high 1.18177) and then at 1.1840. Immediate support can be found at 1.1800, followed by 1.1785. The ECB is expected to announce that it will start trimming its monthly asset purchases to EUR 40 billion from EUR 60 billion in January. Traders will scrutinise what Mario Draghi will say in his press conference. Likely range today 1.1780-1.1830.
AUD/USD – The miss on Australian inflation data saw the Aussie slide as expectations of a rate increase by the RBA were reduced. The Australian Dollar slumped to an overnight low at 0.79901 before settling at 0.7700. AUD/USD has immediate resistance at 0.7740/50 which was the previous support level. Any gaps higher would initially stop at the 0.7750 level. Immediate support lies at 0.7690, overnight lows. Strong support can be found at 0.7680 which should hold unless the US Dollar strengthens further. Likely range today 0.7690-0.7740. Look to sell Aussie on any bounce.
GBP/USD – jumped in volatile trade and gapped to 1.3271 following the better than forecast UK GDP data. Brexit fears were cast aside for now. Expect more choppy trade ahead for GBP/USD. The upbeat GDP data provided a much needed respite for the Pound, reeling from the effects of strong US Dollar and continuing Brexit uncertainty. Questions remain over the medium term future of the UK economy which has seen lower rates of productivity. Concerns over the progress on talks over Britain’s withdrawal from the European Union will weigh on Sterling. GBP/USD has immediate resistance at 1.3275. Immediate support lies at 1.3230 and then at 1.3190. Likely range today 1.3220-1.3280. Prefer to sell rallies.
USD/JPY – ended slightly lower at 113.72 from 113.80 yesterday. The US Ten year bond yield climbed another 2 basis points to 2.44%. The yield on the Japanese Ten year JGB bond was unchanged at 0.06%. This should keep USD/JPY supported overall. The Dollar has immediate resistance at 114.00 and then at 114.20. Immediate support lies at 113.50. Yesterday’s fall in the USD/JPY from its highs was the result of a bout of risk aversion, which has been absent of late. It would be premature to dismiss any further risk aversion in the days ahead. Likely range 113.50-114.00. Prefer to sell rallies above 114.00.
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