-The euro rally petered out last night as profit taking in US equities took out some of the initial gains.
Overnight EUR/USD declined to 1.2376 after having briefly traded above 1.2440 yesterday. In our view EUR/USD is likely to continue to go higher over the coming weeks as short EUR positions could be unwound given the lack of near-term trigger events. For more on the possible unwind of short euro positions.
-Yesterday, we also put out a note for clients with EUR or GBP income or assets. We recommend to hedge exposure three to six months forward at the current level. We recommend considering Forward Extra Plus strategies as an alternative to forwards, which would preserve some EUR/USD downside risk and benefit from a possible decline in implied volatility.
-Sterling lost some ground against the US dollar overnight and GBP/USD trades around 1.56 this morning as the market awaits today’s inflation report from Bank of England. BoE will most likely revise growth and inflation forecasts lower and dampen the optimistic tone struck in the previous Inflation Report from May.
The current round of Gilt purchases will finish in late October and the effect of the FLS is yet to be seen. We believe the Bank of England will cut the base rate by 25bp to 0.25% in November and lift the asset purchase target by another 50bn to GBP425bn at the November meeting. All in all we expect further pressure on Sterling against both euro and dollar in Q3.
-Bank of Japan starts its two-day policy meeting today. We agree with consensus expectations that BoJ will leave its asset purchase programme and the target rate unchanged this time but we could see some temporarily spikes in USD/JPY if speculations of BoJ action emerge.