EUR pricing amid low rates, QE exit

The pound has gone wild on Thursday. The GBPUSD tanked to 1.3120 as the European Union’s Chief Negotiator for Brexit Michel Barnier said the EU will start ‘internal preparatory discussions’ amid the ‘Brexit impasse’ on the divorce bill. Shortly after, the pair rebounded to 1.3290 on news that Barnier could eventually offer the UK a ‘two-year transition period to stay in the union', of course, without being given the right to vote on decisions over this period.

Brexit negotiations aside, the pound sentiment is somewhat positive provided that the UK inflation, due next Tuesday, is expected to have hit the critical 3% level in September. Strong inflation read should revive expectations that the Bank of England (BoE) could raise rates as soon as the next MPC meeting in November.

The GBPUSD recovered to 1.3312 on Friday. Brexit news remain the major downside risk to long-GBP positions.

The FTSE 100 hit a record high on Thursday on the back of a curbed pound appetite and perhaps on hope that the EU and the UK could start discussing the post-Brexit partnership at next week’s summit, if sufficient progress is made. The UK stocks began the session downbeat. The correction could deepen into the weekly closing bell as Brexit uncertainties loom before October 19/20 summit in Brussels, while the pound is subject to upside pressures.

To us, the EU will unlikely open a new page with the UK before agreeing on the Brexit fee, which should stand between 50 and 100 billion pounds to finance pensions of former EU staff in the UK, the relocation of the EU agencies and several other financial commitments to the EU projects.

Euro seeks direction amid Draghi’s rock-bottom rates vs QE exit

The European Central Bank (ECB) President Mario Draghi promised lower rates ‘well past’ the end of the Quantitative Easing (QE) program despite the German discomfort. This being said, the low rate expectations should not interfere with the ECB’s QE exit plans. Presently, traders are pricing in the QE normalisation rather than the flat ECB rates, which are already factored in the euro's valuation. The euro bias remains on the upside, there are talks that the ECB could cut monthly bond purchases by at least 50% from January. The EURUSD is in the bullish consolidation zone. The pair tested 1.1880 resistance (50% retracement on September - October decline) on Thursday. Surpassing this level should pave the way toward 1.1930 (major 61.8% retrace) before the 1.20 mark.

European stocks kicked off the session rangebound. The DAX (+0.10%), the CAC (-0.01%) and the IBEX (+0.06%%) lack the bulls’ support due to the euro appreciation and perhaps the uncertainties about the Catalan government which is due to give more clarity on its independence decision by next Monday. European equities could refrain from taking a fresh direction before the weekly closing bell.

USD softer on dovish Fed, bank earnings in focus

Dovish Federal Reserve (Fed) comments weighed on the greenback. St Louis Fed’s James Bullard said that the Fed should defend the inflation target or it will risk losing its credibility, as Lael Brainard cited she sees merits to allowing higher inflation after future recessions. Although a December Fed rate hike is seen as highly probable, frictions at the heart of the FOMC are uncomfortable for the USD bulls. The US 10-year yield retreated to 2.32%.

On the other hand, the US producer prices accelerated more-than-expected in September. The retail sales and the consumer price inflation data are due today and analyst expectations are positive. The US consumer inflation may have improved to 2.3% year-on-year from 1.9% printed a month earlier. A solid inflation read could wipe out the recent dovish comments from the Fed members.

Monetary policy talks didn’t distract the US equity traders. US equities stalled at all-time highs in New York, the Dow Jones renewed record.

JP Morgan (-0.88%) and Citigroup shares (-3.4%) edged lower despite announcing revenue and earnings growth in the third quarter. Sell-off was certainly due to higher reserves for consumer loan defaults and prospects of weaker consumer credit. Wells Fargo and Bank of America will release results before the US open.

Some colour out of Asia

Chinese trade surplus fell more-than-expected in September. The trade balance narrowed from 286.50 billion to 193.00 billion yuan as exports expanded less-than-expected while imports grew faster. Yet imports to Asian regional markets were robust, reaching all-time highs in destination to some regional partners, such as Korea. The USDCNY consolidated below 6.60 level as solid data and prospects of more freedom on the FX trading brings investors back to the yuan.

The AUDUSD extended gains. Iron ore futures rose 4.73% as Chinese steelmaker hub Tangshan asked companies to curb output earlier than plans to help closing the gap between the futures and spot prices. The Aussie could target 0.7855 (100-day moving average) in the extension of four consecutive session gains, after having successfully held ground above the 50% retracement level on April – September rise (0.7726).

Nikkei (+0.96%) traded above 21’000 level for the first time in more than two decades. The USDJPY tests the 112.00 handle on the downside, as investors seem reluctant to move into a softening US dollar before the October 22 snap election in Japan. PM Shinzo Abe has no major threat given that his main rival Yuriko Koike has pulled herself out of the race.