drivers of price action
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- Nov, 19 Yen Finds Support On Flight To Safety, Ahead Of BoJ Rate Decision
- Nov, 18 Canadian Dollar Range Bound As Oil Remains Capped
- Nov, 17 Pound Strength May Continue If Inflation Data Fuels Interest Rate Expectations
- Nov, 16 Euro Supported As Equity Markets Soar, Is It Sustainable?
- Nov, 13 Yen Becomes Increasingly Vulnerable As Risk Appetite Grows
- Nov, 11 New Zealand Dollar At Risk If Commodities Start To Lose Favor
- Nov, 10 Pound May Plot New Direction If Inflation Report Influences BoE
- Nov, 09 Euro Driven Higher By Soaring Equity Markets
- Nov, 05 Yen Looks To Regain Status As Top Funding Currency From Dollar
- Nov, 04 Australian Dollar Continues To Track Commodities Higher, Ignoring Dovish RBA
- Nov, 02 Pound Remains Directionless With BoE Meeting Ahead
- Oct, 30 Canadian Dollar Slumps Following Oil’s Lead
- Oct, 28 Euro Weakness May Continue, If US GDP Figures Fail To Revive Risk Appetite.
- Oct, 27 Pound’s Direction to Come from BoE Meeting, Credit Report Will Provide Insight
- Oct, 23 New Zealand Dollar Strength May Continue With A Potential RBNZ Rate Hike Looming.
- Oct, 22 Euro and Dow Challenge Psychological Barriers, Will The Rally End?
- Oct, 21 Canadian Dollar Soars On Higher Oil, But Will Crude Run Out Of Steam?
- Oct, 20 Pound Starting to Take Its Cue From Interest Rate Expectations, Will BoE End QE?
- Oct, 16 Will A Pullback In Equities Sink The Euro?
The Euro fell sharply overnight as equity markets tumbled on valuation concerns as the scope of the global recovery remains uncertain. Risk sentiment continues to be the main driver of price action for the single currency and is currently explaining 62% of volatility for the EUR/USD.
EUR/USD
The Euro fell sharply overnight as equity markets tumbled on valuation concerns as the scope of the global recovery remains uncertain. Risk sentiment continues to be the main driver of price action for the single currency and is currently explaining 62% of volatility for the EUR/USD. Interest rate expectations for the ECB and the Fed have started to grow in importance but both central banks are expected to remain on hold this week, limiting their influence. Regardless hints of potential tightening should be looked for in post announcement statement, as any signs of a change in monetary policy could increase the significance of yield expectation in future price action.
ECB Interest Rate Expectations
The markets are currently pricing 90 bps worth of rate hikes by the ECB over the next twelve months. The central bank isn’t expected to begin tightening at this Thursday’s meeting but could hint that a policy change is on the horizon. Any hawkish rhetoric from President Trichet could significantly alter interest rate expectations and increase their influence on price direction. Euro-zone retail sales and German factory orders are also on tap for the week and early forecasts are for both gauges to show improvement. The improving fundamental data supports the European Union’s improved outlook for growth, as it raised its forecast for 2010 GDP to 0.7% from 0.1%. In Brussels today, the European Commission, the E.U.’s executive branch, said that “A relatively strong temporary pick-up is in the cards for the near term.” However, the commission predicted that unemployment and government debt will continue to rise which could lead to a balanced statement from policy makers.
FOMC Interest Rate Expectations
Fed funds futures are currently pricing in a 5.3% chance of a rate hike by the end of the year which is down from 6.6% a week ago. The FOMC will meet tomorrow to determine future monetary policy and is widely expected to keep rates on hold with Fed Funds Futures showing a 0% chance of an increase. Today saw a 0.9% rise in factory orders in September added to the improving manufacturing picture but the declining labor picture is the main concern for policy makers. Until there are signs of job growth, expect the central bank to maintain their dovish stance putting the spotlight on Friday’s Non-farm payroll report.
Risk
Equity markets continue to trend lower building upon losses from yesterday as concerns over valuations rise. The weak labor picture will come into focus this week and has market participants concerned that third quarter growth won’t translate into more jobs. Companies remain in cost cutting mode which has helped beef up their bottom line and unless they see signs of robust growth they may chose to operate under staffed. Therefore, we may see risk appetite continue to fade dragging the Euro along with it.
To discuss this report or be added to the email list contact John Rivera, Currency Analyst: jrivera@fxcm.com
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