Post date: 28/10/2019 09:30
There was not a lot of excitement in G10 currencies last week outside of Sterling. The Pound gave up some of its recent gains as the prospects for a general election cloud the prospects for a near-term parliamentary agreement on a withdrawal agreement. Steady PMI indices of business activity in the Eurozone were overshadowed by a downbeat assessment from Draghi at his last ECB meeting, and European currencies joined Sterling in the pull back against the US dollar. Emerging market currencies generally put in another positive performance, led by the Brazilian real which rose on news that pension reform was approved by the senate there.
Key for this week will be a slate of major central bank decisions. The most important is of course the Federal Reserve, expected to cut rates by a quarter point on Wednesday. The Bank of Japan and Bank of Canada decisions will round up the week, capped by the US payroll report for October Friday afternoon.
Boris Johnson called for a general election on December 12th is unlikely to receive the two-thirds approval it needs from Parliament, given Labor's opposition. As this is written there are news that the EU is ready to extend the October 31st Brexit deadline by three months, which should at least remove the tail risk of a no-deal Brexit in the near term. Parliamentary gridlock and the absence of first tier macroeconomic data could cause Steering to take a break from the previous weeks wild gyrations.
The all-important PMI indices if business activity bounced back slightly, confirming that the Eurozone growth has stabilized just above the stalling level for now. However, Draghi's downbeat assessment of the Eurozone economy at his last ECB meeting weighed down the Euro. We will get another raft of important macroeconomic data this week, including September unemployment and third-quarter GDP growth. Expectations have been beaten so low that even modest numbers may result in a Euro rally. However, these are backward looking data, so we expect the Euro to react mostly to the Federal Reserve meeting on Wednesday.
The week was short in market-moving economic releases, so financial markets mostly celebrated the perceived likelihood of a China-US trade deal and sent equity markets to fresh highs. The dollar performance in this risk-seeking environment was mixed, rising against most G10 currencies but retreating against the majority of emerging market currencies. All eyes now turn to the Federal Reserve meeting Wednesday. We expect them to cut rates in line with market consensus, but communications should be on the hawkish side, as on balance risks to the outlook seem to have receded since the last meeting. This could open the way for a dollar rally in the short term.