A wave of USD buying at the London open unwound the better tone in EUR/USD that had emerged during Asian hours. A break below the EUR/GBP0.9100 opened the floodgates for EUR supply and this no doubt kept the pressure on EUR/USD, though the latter has since recovered from the morning's lows. Sterling continues to find support on talk that the abysmal Q3 GDP report will be revised higher. European stocks have managed to shrug off their weak start and this provided the later support for EUR/USD. While the movements in stock market remain a key determinant of direction for the USD, the proximity of the next FOMC and G-20 Finance ministers meeting is likely to ensure the USD finds support over the next couple of weeks.
The next FOMC meeting is scheduled for Nov 4. Speculation is emerging that the Fed will discuss the timetable for its exit policy. It is a matter of prudence that the Fed prepares its exit procedures. That said, economic data suggest that policy will retain its very accommodative stance for many months yet and that Fed rates will remain at their lows at least until the second half of next year. This view is unlikely to be changed by next week's FOMC meeting suggesting any USD support from this event could be short-lived. Similarly, the USD may find some from the approaching G-20 finance ministers meeting in Scotland on Nov 7. The topic of fx is likely to be sidelined by banking regulation. However, such a gathering is likely to bring further support for the US Treasury's strong USD policy particularly from Eurozone ministers. It may also contain protests from the Europeans about the EUR bearing the brunt of the USD's fall. This would be an objection to the present renminbi peg vs the USD which is a topic set to garner increased political attention in the months ahead. The risk of actual intervention in support of the USD remains small at present and this suggests that while verbal intervention may continue to contain the pace of USD losses, the USD could re-embark of its downtrend later in the month.
EUR/NOK has trended higher this morning. The market is overwhelmingly expecting a 25 bp rate hike from the Norges Bank tomorrow. Falling risk appetite also hit the AUD early on despite near-certain calls for a RBA hike next week. The central bank of India took preliminary steps towards tightening liquidity today causing stocks and thus the INR to weaken. By contrast, weak Eurozone M3 data for Sep at 1.8% y/y represents the lowest rate on record suggesting that the ECB's extraordinary liquidity provision measures are not having the desired impact and implying the ECB will keep its policy of generous liquidity provision in place for some time. The BoE's Posen remarked that QE is not causing high inflation. Last week's poor UK Q3 GDP data has put the threat of an increase in QE back on the table at the Nov 5 MPC.
Sterling's support today stems from talk that the GDP data may be revised higher on Nov 25. This talk found further support in the solid CBI retail report for Oct.
This afternoon, US house price data, consumer confidence and the Richmond Fed manufacturing index are due for release.
