All eyes on the ECB meeting tomorrow where the market is anticipating Pres. Draghi to announce an extension to QE and a further cut (negative) to deposit rates. Should this be announced I am “expecting” like the rest of the market the EUR to be sold off initially (knee jerk reaction) against the major currency partners. Over the past few weeks we have seen the EUR tumble vs the USD (and GBP) in anticipation of this announcement in conjunction with the much anticipated FED rate hike on the 16th December (though nothing is set in stone). I would imagine that the FX rates have already discounted the ECB news however fact is very different to rumours and thus the moves might not be as severe as you would think. Nevertheless I think the EUR will remain under pressure until at least the 16th December when the FED announce their rate decision.
Talking about the FED yesterday the ISM (Institute for Supply Management)November data was released and disappointed at 48.60 vs 50.1 (October) – questions are now being raised whether the FED can and will raise rates with the ISM sub 50 barrier. We have said previously that the FED’s decision to raise or not is very “economic dependent” and therefore disappointing data will not help the raise rates camp. Non-Farm Payrolls on Friday is thus critical to the FED’s decision and any fall from last month will not simply be brushed off as a “hick up”. Remember NFP fell from +280K in June to +142K in October before rebounding to +271K in November. I stated that this rise could be seen as cyclical in nature given the Xmas rush to produce extra goods ahead of the holiday season. Surely the FED need to see at least 3 months of growth in NFP before a trend is established? Then again they see the bigger picture and have a great deal more info to use in order to make their decision. Hence when I stated above nothing is set in stone, I think the raise rates camp could be disappointed on the 16th as the FED decide to hold back to early 2016 and see how corporate earnings have fared over the Nov-Jan period. You also have to keep in mind that the strong USD has in some ways hurt the FED as corporates announced lower earnings (exports) due to the strong USD. Granted a 0.25% hike is psychologically important, but in the big picture it is really a small piece of the puzzle. The FED cannot and should not jump the gun and get out the starting blocks as a false start could mean being penalised and disqualified. In other words why add salt to the wound (strong USD).
To qualify what I have written above here are some comments from FED members:
- FED’s Brainard said in a speech that “a broad deterioration in
foreign growth prospects, together with greater risk sensitivity
in the wake of the crisis and changes in the rate of potential
output growth, may be contributing to a ‘new normal’”. “The
new normal is likely to be characterized by a lower level of
interest rates than in the decades preceding the crisis, which
counsels a cautious and gradual approach to adjusting monetary
policy,” she said.
- FED’s Evans said “I admit to some nervousness about our
upcoming decision,” Evans, a 2015 voter on the policy-setting
Federal Open Market Committee.
- An ex-staff member (no name given) of the FED thinks that it’s still too early for the Fed to start raising interest rates.
The GBP finally broke through the 1.50 handle before recovering to 1.51 but has since retreated again and looking heavy. My sentiment has not changed and I am still of the view that the GBP will crumble through 1.50 over the coming days en route to 1.45 handle. However vs the EUR I think things are looking slightly different and the GBP should hold her ground vs the EUR and in fact strengthen.
Lastly, 29 days left for my prediction on the 01 January that the EUR will hit PARITY vs the USD before the year is out.
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