A welcome boost for the EU sentiment

The Eurodollar has traded narrowly for the past two days, with investors most likely focusing on the release of the European Central Bank (ECB) stress test report on Sunday evening. Several rumours have emerged that as many as 18 banks have failed the health checks that have been conducted on the 130 Eurozone banks. If this proves to be accurate, it will certainly have bearish implications on the Euro with the pair likely to open below 1.26 on Monday morning.

The EU economic sentiment was provided with a much-needed boost on Thursday when the latest PMIs came in above expectations. Despite the Eurodollar declining by over 1400 pips over the past couple of months, we previously failed to notice any correlation between the weaker Euro exchange rate and improved economic data. Finally, we could be seeing a correlation emerge. The downside risks for the pair such as dangerously low inflation and weak investor confidence very much remain, but a continuation of improved PMIs will calm down fears of stagnant economic growth. At a later date, consistently improved PMIs will also help improve inflation levels.

Meanwhile, the Cable is now recovering some of the recent 100 pip losses with the pair currently trading at 1.6062. Minutes ago, it was declared that the UK GDP expanded by an annualised 3% during Q3. Although growth slowed down from the 3.2% recorded in Q2, providing more validity to the Bank of England’s (BoE) recent comments that the UK is losing economic momentum, the IMF recently declared that the UK was set to become the fastest growing economy in the advanced world and 3% growth remains a strong performance. UK economic data is low for the next couple of days, with the pair expected to consolidate now around 1.60.

The USDJPY advanced by over 130 pips on Thursday, before concluding trading at 108.120. A combination of positive US inflation data reducing fears the Fed could unexpectedly continue QE, initial jobless claims impressing, and a high Japanese Trade Deficit weighing on the JPY contributed towards the bullish movement. Already today, this pair has showed signs of pulling back with the pair trading as low as 107.856 this morning. There seems to have been a lot of speculation that the latest Ebola case in New York was the main catalyst behind the USDJPY pullback this morning, but I remain unconvinced.

So far, there have been very few cases of Ebola diagnosed in the United States, which of course I hope continues. However, the profit-taking on the USD last night was probably linked to investors remaining on edge from the global market sell-off last week. Additionally, an awareness that although the Fed really should conclude QE next week, an interest rate rise is far away and the Bank of Japan (BoJ) is unlikely to issue more stimulus, which all encouraged profit-taking.

Regarding next week’s highly anticipated FOMC decision, I am expecting the Federal Reserve to conclude QE. However, I am also expecting a considerable amount of USD profit-taking to commence during the speech from Janet Yellen. I have said for some time that the Federal Reserve will not be raising interest rates anytime soon, and I am expecting Janet Yellen to confirm this next week. Yellen will likely reiterate exactly how slow the US economic recovery has been as well as the global economic recovery remaining in question. Investors have become a little bit over excited by the improved economic data in recent months. I am not expecting talks about a US rate rise within the Federal Reserve to elevate until January or February 2015, with a rate hike seeming possible for September 2015.