A Look at the Majors

Forex Watch, Fundamental Analysis, fx trader, forex

19 Oct 2016

● USD (NEER) – The dollar opened the week with a slight decline, weakened by data releases which – like Friday’s – were mixed. While industrial output recovered as expected, the Empire index disappointed, dropping against expectations for an increase. From the Fed front, Fischer, like Yellen, mentioned the possibility of allowing the US economy to overheat slightly, before continuing the process of normalising monetary policy. Inflation data will be released today, and expectations are for a stabilisation of the “core” index and for a marginal decline of the “headline” index. This would strengthen the arguments of the FOMC members which, while in favour of hiking rates soon, wish to see further evidence of the uptrend of inflation before proceeding along the hike path. In this case, the dollar will not find it easy to recover from yesterday’s decline, unless data surprise on the upside.

● EUR – After opening the week by hitting a new low at EUR/USD 1.0964, the euro returned into the 1.10 EUR/USD area. Euro area inflation data confirmed the advance estimate of an increase to 0.4% in September from 0.2% in August. If the inflation uptrend is confirmed, the ECB may not need to further step up monetary stimulus. Should the ECB send signals in this direction at Thursday’s meeting, the euro would strengthen. In the meantime, in waiting for the meeting, the exchange rate should stay at around EUR/USD 1.1000.

● GBP – Sterling opened the week broadly stable at Friday’s levels, in close proximity to GBP/USD 1.2200 (and EUR/GBP 0.9000). Broadbent (BoE) said in an interview that the depreciation of the exchange rate will help the UK economy face the Brexit shock. Questioned on whether the authorities will intervene to halt the descent of the pound, Broadbent answered that “having a flexible currency is an extremely important thing especially in an environment when your economy faces a shock that is different to your trading partners”. He also added that in light of the depreciation of the pound, inflation will rise somewhat above target, but he showed no concern for this, explaining that “If we had wanted to ensure there was no chance of inflation rising above target, then we would have had to set tighter policy. That would have meant lower economic growth and that would have increased the chances of unemployment going up”. Broadbent’s line is similar to the one expressed last week by Carney, who let on that in the present phase growth will be given priority over inflation. Inflation data will be released this morning, and consensus expectations are for an increase from 0.6% to 0.9%, which would not help the pound climb back.