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Strong Equity Market Gains Put The Dollar Under Renewed Pressure

The strong performance of equity markets today has ensured the USD remains under selling pressure and most major currency pairs remain at elevated levels against the USD in their recent ranges. In Europe, the FTSE is up around +2.1%, DAX +2.4%, and in the US, the S&P is up nearly +1.7% at the time of writing. Consequently, the flow of USD selling has been persistent throughout the day, and with most major risk events out of the way, it is likely this trend will carry on into the Asian session.

PMI data out of Europe was broadly higher on the month, with European and German surveys beating estimates for both Manufacturing and Services components, however the upside surprises had limited impact on the currency. Although EURUSD has rallied higher today, it is by no means outperforming the other majors, and the 1.5000 high has posed a persistent barrier to further upside gains. We still believe the 1.4800-1.5060 broad range is secure until a significant event can prompt a USD break-out on either side; a candidate of sufficient profile could be Wednesday’s release of the FOMC Meeting Minutes, however given the extensive amount of Fed rhetoric last week, it seems unlikely that the release will contain any surprising insights or signal a change of stance from the Fed.

The afternoon session kicked off with Canadian Retail Sales which posted a higher than expected 1.0% increase in September (consensus 0.6%, and prior reading revised up to 1.0% from 0.8%). USDCAD spiked down 30 pips on the release from 1.0595 to 1.5065, but the scale of the move is dwarfed by the larger USD-driven move that has played out throughout the day; taking the pair down from 1.0710 levels at the start of the day to 1.0540 lows so far. The only other release has been US Existing Homes Sales data which smashed estimates with a monster 10.1% increase MoM against estimates for 2.3% (last month’s reading revised slightly lower to 8.8% from 9.4%). Both EURUSD and gold rallied immediately after the release, with gold touching a new high at $1173.90; but EURUSD could only manage a 15 pip rally to 1.5000 highs before stalling in the face of good supply, confirming that for now the range is holding firm.

Looking forward to the coming sessions, we have a busy calendar of significant events lined up for the majors; starting with Germany’s final Q3 GDP reading and IFO sentiment reports. The latter is likely to be the most significant for EUR, as the results will be crucial for the market’s growth expectations going forward – in particular watch the Business Expectations component which is forecast to increase to 97.3 from 96.8 last month. The other key focus of the morning will be the UK central bank Governor Mervyn King and fellow MPC members testifying to the UK Treasury on the recent November Inflation Report. GBPUSD has made sizeable gains in recent weeks on the improvement in risk appetite coupled with the assumption that the end of QE may be likely after the current 25bn expansion to the asset purchase target is complete. However, the Inflation Report hinted that this may not be the case, and indeed suggested the possibility of cuts to the deposit rate as being options for encouraging lending. It will therefore be critical to be vigilant for any references regarding these two policy tools, with the GBP likely to suffer heavily if it looks like there will be a heightened chance of more QE or indeed a rate cut in the short term. Other European releases of note will be Swiss Unemployment (estimated to deteriorate by a further -0.8% annualized in Q3), and Norwegian Q3 GDP which is forecast to increase by 0.8% QoQ after Q2’s -1.3% contraction. The afternoon brings the second reading of US Q3 GDP, where economists are predicting a downward revision to 2.9% annualized from the initial 3.5% print.

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