Will FOMC Minutes Stop Today's EURUSD Recovery?

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EUR/GBP: short at 0.7075, target 0.6950, profit locked in at 0.7035, risk factor ***

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EUR/USD Recovery Is Likely To Be Limited, Eyes On FOMC Minutes

• The Federal Reserve reported that industrial production slipped 0.2% m/m in October, a disappointing move compared to the consensus call of 0.1% growth. Factory output, however, was up a respectable 0.4% vs. expected up just 0.2%, with mild weather pulling utility output down 2.5% and ongoing energy weakness leading to a 1.5% drop in mining output.

• A rise in manufacturing output is a surprisingly good reading given how weak the factory surveys have been recently. All five regional Fed surveys were negative in both September and October, and the ISM national PMI eked out prints of just 50.2 and 50.1. Respondents to some surveys have continued to complain about the stronger USD, as they have nearly all year, while high levels of inventories throughout the supply chain have conspired to keep orders down.

• Capacity utilization slipped again, to 77.5% from 77.7% (revised up from 77.5%). That's its lowest in 20 months, certainly providing no sign of supply-side inflation pressure.

• Despite the decent manufacturing number this month, we do not expect great improvement there in the near future. The headwinds remain, with unplanned inventory accumulation having built up a very large overhang - September's 1.377 inventories / sales ratio was the highest since the end of the recession. Meanwhile, manufacturers are still having a hard time adapting to the currency environment.

• In the 12 months through October US consumer price index advanced 0.2% after being unchanged in September. The market expected CPI edging up 0.1% from a year ago. Signs of stabilization in prices after a recent downward spiral is likely to be welcomed by Fed officials and give them some confidence that inflation will gradually move toward the central bank's 2.0% target.

• The so-called core CPI, which strips out food and energy costs, increased 1.9% yoy after rising by the same margin in September.

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Significant technical analysis' levels:

Resistance: 1.0692 (session high Nov 18), 1.0759 (10-day ema), 1.0778 (high Nov 16)

Support: 1.0630 (low Nov 17), 1.0624 (low Apr 16), 1.0571 (low Apr 15)

GBP/USD: Broadbent Downplayed BoE Forecasts

• Bank of England Deputy Governor Ben Broadbent said that pricing in financial markets for when Britain's record-low interest rates are likely to rise could be misleading and risked changing quickly. He also cautioned investors not to “focus obsessively” on the BoE's inflation forecasts and instead to concentrate on the broader factors driving growth. Broadbent said the Bank's inflation forecasts were a far from perfect indicator of what was likely to happen with borrowing costs.

• Business surveys measuring private-sector growth had in the past offered a better guide to how the Bank's rate-setters would vote over the following three months than looking at how far the BoE forecast inflation would miss its target, he said.

• Broadbent said markets appeared to push expectations for the timing of rate hikes much further back than economists at times of risk aversion among investors, such as now as concerns mount about the global economy. Yield curves factored in risks, such as the desire of investors to insure against an unexpected global slump, that did not directly feed into when the BoE was most likely to start to raise rates.

• Our economists expect a rate hike in the second quarter of 2016. But markets are only fully pricing in a 25 basis point increase in early 2017.

• Ben Broadbent said Britain's large current account deficit is of some concern, although he would be surprised if it were to affect the central bank's policy decisions. He also said he thought the current account deficit was more likely to improve than worsen, and added that he saw no virtue in moving interest rates in increments of less than 25 basis points.

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Significant technical analysis' levels:

Resistance: 1.5263 (high Nov 13), 1.5318 (61.8% of 1.5498-1.5027), 1.5401 (high Nov 5)

Support: 1.5155 (low Nov 17), 1.5149 (50% of 1.5027-1.5270), 1.5120 (61.8% of 1.5027-1.5270)