Good morning

Exceptionally quiet day on the FX markets with high lows restricted to a mere 20 pips. December is generally (believe it or not) quite a volatile month as a result of the reduced volatility, however this time round we had the FED raising rates which has put a dampener of moves.  If one has a look at FX volatilities this lack of volatility is quite evident. EURUSD 1m 9.20/9.55 – 3m 9.95/10.25 – 1y 10.05/10.25 while in GBPUSD, 1m 6.95/7.25 – 3m 7.80/8.00 – 1y 9.85/10.20. You can see from the latter how “steep” the curve is as a result of the anticipated rate hike that’s coming in the UK during the latter half of 2016. With the upcoming holiday season and 4 day holiday, traders are reluctant to pay “time decay” and therefore happy to sell front end “gamma” to earn decay – premium over the coming days. While the market still expects the USD to come out fighting and rally towards PARITY (EUR/USD) and 1.45 handle (GBP/USD) for now the mood is sombre.

The most important data release of day comes out the US with the release of 3Q GDP. The release is at 1.30pm Ldn time. As you can see below, last Q the US grew at 2.1% with the market now expecting Q3 to show growth at 1.90% – which again takes me back to yesterday’s commentary when I noted the FED will be eagerly awaiting the release of this number as they have clearly stated last week, further rate hikes will be DATA DEPENDENT. So we await today’s numbers for confirmation just how steady the US economy is and whether FED chair Yellen and her colleagues were spot on by raising rates last week.

EURGBP has been having a torrid time of late, falling from 0.7050 (1.4185) to 0.7335 low (1.3630). The losses have been compounded in recent weeks by the ECB announcement that QE extension (or not) and the reduction in EUR depo rates by “only” 0.10%. Further austerity measures in the UK and delays in rate hikes have not helped the GBP and as things stand there is a “good chance” the GBP could fall further towards 0.7450 (1.3420) before starting the recovery. I have noted previously I think the EUR (v USD) is starring down the barrel of despair and while my prediction for the EURUSD to hit PARITY by 31 December 2015 seems to have all but disappeared, I will still get my wish in early 2016!! When this happens the moves will be EUR led (rather than GBP strength) and so I expect the GBP to recover these losses in early 2016. Furthermore, vs the USD, I think the GBP will fair better (than the EUR) with losses initially contained to 1.45 (circa) which should all mean EURGBP (GBPEUR) sub 0.7000 (1.4285) – here’s hoping

Have a good day

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