By GCI Forex Research
Fundamental Outlook at 0800 GMT (EDT + 0400)
USD
In the run-up to the FOMC meeting next week the jungle drums are beating. Why does the NY Fed poll market participants on their expectations regarding the QE volume? The USD positive explanation is: It is uncertain how large the volume should be. As a fine balance has to be struck between a sufficiently large effect on the bond markets (to ensure that yields fall or remain low) and inflation effects that are manageable (so that yields do not rise). The USD negative “conspiracy” theory is: The Fed wants to maximise the effect with a surprisingly large QE 2.0 volume. For that to be possible it will have to know what sort of volume would surprise. We do not believe in conspiracy theories.
Today’s US GDP data is unlikely to have much of an effect – unless it surprises notably. Regardless of whether the GDP will be slightly higher or lower: QE is a fait accompli.
EUR
European Council President Van Rompuy said EU leaders agreed to changes in the EU treaty focused on creating a mechanism for crisis resolution. However, he also said that the “no-bailout” principle will be kept. ECB Governing Council Weber said a mechanism needs to be developed for any acute Eurozone crisis, and that the problem of internal Eurozone imbalances must be dealt with.
Portuguese Prime Minister Socrates said the government wants to reach an agreement on the 2011 budget proposal to ensure that it is passed on November 2. Eurozone spreads had widened when discussions between the government and the main opposition ended but reports that the ECB bought Irish bonds in the market helped curb the spread widening. That said, investors are still pricing in a good deal of uncertainty in peripheral economies, which is likely restraining significant euro upside.
SNB officials Danthine and Hildebrand were on the wires but did not offer much new regarding monetary policy. Danthine was largely non-committal on the Swiss outlook, which indicated the SNB’s comfort with current policy. Hildebrand spoke on “Monetary Policy and the Real Estate Market”. His comments indicated he considers inflation to be a non-issue and sees some risks in the Swiss housing market. All in all there were no signs of any imminent monetary tightening.
JPY
Manufacturing PMI in October was 47.2, down from 49.5 in September. Similarly industrial production in September was -1.9% m/m (cons. -0.6%, prev. -0.3%). The slowdown in manufacturing activity is mainly due to slowing export growth on the back of a stronger yen. Core inflation came in at -1.1% y/y (cons. -1.0%, prev. -1.0%), falling for the 19th consecutive month. Labour data was also released, with the unemployment rate slipping to 5.0% versus consensus for a flat 5.1% reading.
USDJPY remained capped for much of the session as investors recalibrated Fed expectations, though the BoJ’s decision to bring forward the Nov 15-16 meeting to Nov 4-5, suggesting scope for more immediate action based on what the Fed does, could lend some support to USDJPY.
TECHNICAL OUTLOOK
EURUSD BULLISH While support holds at 1.3637, expect recovery towards 1.4159 and 1.4373 next
USDJPY BEARISH Outlook is bearish with initial support defined at 80.41 ahead of 79.75 and 77.91. Resistance at 81.99
GBPUSD BULLISH Upside potential has scope for 1.6107. Support holds at 1.5606
USDCHF BEARISH Rise above 0.9918 breakout low exposes 1.0183. Support holds at 0.9703 ahead of 0.9463
AUDUSD BULLISH Break of 0.9662 support but holds well above 0.9542 reaction low. Resistance at 1.0004
USDCAD BEARISH As long as 1.0380 continues to cap the upside, expect decline towards 1.0154 ahead of 0.9981
EURCHF BULLISH Momentum is positive; expect acceleration of gains towards 1.3924. Near-term support at 1.3456 ahead of 1.3265
EURGBP BULLISH Pullback from 0.8942 eyes 0.8689 with scope for 0.8636 next. Resistance at 0.8885
EURJPY BULLISH Remains constructive above 111.56, keeping our focus on the upside. Upside capped at 115.68 ahead of 116.68
Forex Daily Market Commentary provided by GCI Financial Ltd.
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