EUR Caught Between The Fed, Techs And Month-End

by: Dean Popplewell

Investors seem somewhat prepared to ride through the noise of Capitol Hill’s “political brinkmanship” as seen by global equity markets finally breaking this week’s negative closing streak in the overnight sessions. Also muddying the waters of assorted asset classes is the undertaking of various portfolios repositioning due to month- and quarter-end demand. This activity usually tends to confuse the capital markets landscape for bonds, forex and equity dealers alike – the few not wanting to wait for next week's U.S. job numbers.

Supply and month-end requirements are expected to have the dominant amount of control in today’s stateside trading session. Any G10 currency’s direction may be misread over the course of the final two trading days of the month. Both logic and reasoning could be about to take a back seat. In truth, after several days of inactivity since the FOMC, trade intentions have plummeted. Do not be surprised that many individuals will want an excuse to sit on their hands until next week's NFP data release – event risk and month end flows are most likely to curtail any note worthy risk-taking.

The 17- member single currency is caught between the Fed, techs and the ECB. Even the month-end bid for dollars is expected to have no more than a layman’s impact on the currency direction. Any dovish fodder from the ECB’s head Draghi in a speech in Italy this morning could fuel further EUR top picking. Coupled with a month-end bid for dollars, it is expected to strengthen that prejudice. However, the limited post-FOMC pullback leading to consolidation enhances the tech's bias. Given the balances in event risks, a tight EUR outright range looks to be the most likely of outcomes. It seems that the EUR bulls do not have enough momentum to seriously challenge a break above 1.3555. Vanilla option expiries today at 1.3500 may try and anchor the EUR again. However, the risk reward for none of the faint of heart supports EUR top picking, then close your eyes looking for mid 1.3250′ish.

Data revealed this morning shows that consumers and businesses in the 17 countries that share the EUR are less pessimistic than any other time in the last two years (96.6 for September). This would suggest that the region's return to growth is expected to remain in the medium term. Supporting PMI data many would anticipate growth in Q3. However, will the pickup in confidence lead to higher spending by consumers and businesses? Euro lending data earlier this week would not support this natural progression. Draghi mentioning another LTRO program indicates that policy makers have a confidence and business investment problem.

Trying to fly somewhat solo so far this morning is sterling (1.6080). The currency has moved sharply higher in early trade after the BoE governor Carney indicated that he sees no need for any additional bond buying by the central bank. However, he would consider additional easing if required, but personally does not see any case for one. Of late, the BoE has moved further away from doing QE and any return to aggressive easing would depend on the data. The BoE is the most hawkish of central banks. Carney seems to have brought his "hawkish fervor" with him from the BoC. Similar to other G7 currencies, the lack of market participation and enthusiasm is failing to keep GBP close to its highs – consolidation will have the majors very much range bound.

The last of this week's Fed heads gets airtime for some their personal macro opinions. Chicago Fed President Evans (voter – dove) will speak on the economy and monetary policy this morning. Boston Fed President Rosengren (voter, dove) is giving the opening remarks at a conference at a similar time and finally, New York Fed President Dudley (voter, dove) is scheduled to give a talk on the economy in the afternoon. By then, the market's interest should be at its lowest. With the rising political risk ahead of the debt ceiling debate, this should have a negative impact on risk appetite and on forex market activity in general. Any negative developments are likely to push the USD higher against high yield EM currencies, but with limited implications against most G10 currency pairs for now.

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