By GCI Forex Research
Fundamental Outlook at 0800 GMT (EDT + 0400)
USD
The dollar continued to weaken against the euro during the Asia session in the wake of the FOMC minutes. EURUSD traded 1.3838-1.3979 and USDJPY traded 81.67-82.01. The minutes themselves kept expectations alive that another round of quantitative easing might begin as early as November. Several members considered it appropriate “to take action soon”, but the minutes also made it clear that any additional easing would “depend upon future information about the economic situation and outlook.” Market attention also focused on the presence of New York Fed economist Eggertsson at the meeting. Eggertsson’s field of expertise is the conduct of monetary policy when interest rates are near zero. His attendance at this time is noteworthy given he last appeared at an FOMC meeting in December 2008, the meeting where the original MBS purchase program was launched.
Equities also found some support with the S&P500 closing +0.4% higher. The minutes were vague on what form any additional easing should take, but participants were said to have “focused primarily on further purchases of longer-term Treasury securities and on possible steps to affect inflation expectations.” Possible strategies to affect short-term inflation expectations included “providing more detailed information about the rates of inflation…consistent with its dual mandate, targeting a path for the price level…and targeting a path for the level of nominal GDP.” Attention will now likely focus on Fed Chairman Bernanke’s speech on monetary policy which is scheduled for Friday.
EUR
ECB Governing Council Member Weber repeated his opposition to the ECB’s sovereign bond buying program, saying there is no evidence the purchases have had any significant impact on average Eurozone yields. He said the program “should now be phased out permanently”. Although he stressed the current policy stance is appropriate given that inflation risks are low, he warned that the risks from exiting too late are greater than exiting too early. On the question of how the exit strategy should be sequenced, Weber said that, “in principle”, rate hikes could begin before the phasing out of non-standard measures had finished. He repeated the now familiar ECB position that it is not the job of the central bank to provide long-term liquidity support to the banking system, and invited national governments and bank shareholders instead to provide the cash the banks need.
ECB Governing Council member Noyer said that price stability is still not in danger, and that upside risks are very limited. Elsewhere, ECB Governing Council member Nowotny said that there is no danger of inflation or deflation, and that the idea of a currency war is absurd. However, ECB President Trichet was more cautious and called on the international community to say “no to protectionism and no to beggar-thy-neighbour policies”.
JPY
Finance Minister Noda repeated that Japan reserves the right to intervene in FX markets when needed. BoJ Governor Shirakawa said that he is watching FX markets with great interest and the BoJ could extend the new asset purchase facility it announced at the latest policy meeting depending on the needs of the economy. The facility was originally intended to hold up to ¥5trn in new assets, ¥3.5trn of which may be JGBs.
GBP
UK consumer confidence fell sharply in September to 53 (cons. 59, prev. 62). This was the weakest reading in 18 months.
MPC Member Miles said that the outlook for growth and inflation remains exceptionally uncertain and that quantitative easing remains a potentially powerful tool. He added that it is not yet obvious in what direction monetary policy will next be adjusted, but said the BoE may yet come to use quantitative easing. Cable fell sharply in response to the latter remark.
Yesterday, CPI fell slightly in September, coming in at 0.0% m/m (cons. +0.1%, prev. +0.5%), and at 3.1% y/y (cons. 3.1%, prev. 3.1%). Our economists note that the CPI release is in line with the BoE’s inflation report and should therefore have no material impact on the MPC’s immediate policy decisions. We are cautious on sterling as fiscal austerity will likely dampen growth and keep monetary policy accommodative.
AUD
Consumer confidence stayed firm in October, rising 3.3% m/m to 117.0. Yesterday we learned business confidence only fell very slightly in September. Both readings support our analysts’ expectations for an RBA rate hike at the November meeting.
TECHNICAL OUTLOOK
EURGBP 0.8894 next resistance.
EURUSD BULLISH Focus is on 1.4029 break of which would open up the way towards 1.4194. Support at 1.3775.
USDJPY BEARISH Trend is bearish; initial support at 81.39 ahead of 79.75. Resistance holds at 83.03 ahead of 83.99.
GBPUSD BULLISH Move above 1.6018/69 would trigger further gains towards 1.6276. Support at 1.5670 ahead of 1.5503.
USDCHF BEARISH Look for a break below 0.9500 which will expose 0.9078 next. Resistance at 0.9739 ahead of 0.9918 breakout low.
AUDUSD BULLISH Upside potential held at 0.9918 below 1.000 psychological resistance next. Support at 0.9709 reaction low.
USDCAD BEARISH As long as resistance at 1.0380 holds, expect losses to target 1.0063 with scope for 0.9931 and 0.9820 next.
EURCHF BULLISH Pressure on 1.3265 ahead of 1.3072, but focus is on upside trigger defined at 1.3494 ahead of 1.3665.
EURGBP BULLISH Break of 0.8808 exposes 0.8894 and 0.9039. Support holds at 0.8689 ahead of 0.8563.
EURJPY BULLISH Clearance of 113.26 exposed 110.66 support, but overall outlook is bullish with resistance at 115.68 ahead of 116.68 Fibonacci resistance.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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