EUR/USD: Long For Recovery To 1.1120

EUR/USD: Long For 1.1120

• U.S. Commerce Department said retail sales increased 0.6% after declining 0.2% in August. Sales were up 2.7% from a year ago. Excluding automobiles, gasoline, building materials and food services, retail sales edged up 0.1% last month, reversing August's 0.1% drop. These so-called core retail sales correspond most closely with the consumer spending component of GDP. The market had forecast overall retail sales increasing 0.6% and core sales advancing 0.4% last month. The retail sales report added to upbeat data on the labor market and manufacturing and services sector surveys that have suggested economic growth picked up in the third quarter.

• A second report from the University of Michigan showed consumer sentiment softened in early October amid uncertainty over the U.S. presidential election on November 8, with the campaign taking a more acrimonious tone.

• In a third report, the Labor Department said its producer price index for final demand increased 0.3% last month after being unchanged in August. In the 12 months through September, the PPI jumped 0.7%, the biggest increase since December 2014. The PPI was flat in the 12 months through August. Producer prices are gaining as some of the drag from the dollar's past surge starts to ease. The dollar rally appears to have peaked early this year and oil prices having pushed off multi-decade lows, which could allow inflation to gradually rise toward the Fed's 2% target.

• Fed Chair Janet Yellen said that the central bank need to run a "high-pressure" economy in order to reverse damage from the crisis that depressed output, sidelined workers and risks becoming a permanent scar. Though not addressing interest rates or immediate policy concerns directly, Yellen's lunch address on Friday to a conference of policymakers and top academics laid out the deepening concern at the Fed that U.S. economic potential is slipping - and may need aggressive steps to rebuild it.

• Her remarks, while pointing largely to research she feels needs to be done, nevertheless add an important voice to a debate that is intensifying within the Fed over whether the economy is close enough to normal to need steady rate increases, or whether it remains subpar and scarred.

• Yellen said it may be the case that the crisis has done such permanent damage that fiscal and monetary officials will have to retool how they approach their jobs. For central bankers, that would mean keeping a broader set of less conventional tools at the ready, and using them more quickly in a new downturn. The aim, she said, would be to avoid further scarring.

• Federal Reserve Chair Janet Yellen's speech on Friday on running a “high pressure” economy with a tight labor market to reverse some of the negative effects of the recession suggests the Fed may stay accommodative for longer.

• Fed's William Dudley said: "I think if the economy continues to evolve along the path we expect, I'd expect we'll be raising interest rates relatively soon.” He expects a rate increase this year, but said that a pace of rate rises is likely to be “gentle”.

• The European Union's statistics office Eurostat confirmed that consumer prices in the Eurozone rose 0.4% mom for a 0.4% yoy gain, as expected by markets and in line with initial Eurostat estimates.

• The European Central Bank will be in the limelight this week. We think it is unlikely to bring new policy announcements. With the committees still working on the technicalities for a possible extension of asset purchases beyond March 2017, any action by the Governing Council is likely to come on 8 December, when a new set of macroeconomic projections will be published – including, for the first time, forecasts for 2019.

• However, Thursday’s Q&A session will be closely scrutinized in the wake of recent tapering speculation. Top ECB officials denied the Governing Council discussed a possible tapering of asset purchases. Therefore, we cannot expect ECB President Draghi to add much on this topic. We also doubt he will drop explicit hints about the Governing Council’s current thinking of additional stimulus: that would be premature without full information from the committees and before the updated projections. Instead, we think Draghi will stress that the central bank remains committed to do whatever is needed to meet its price mandate.

• The EUR/USD steadied on Monday and in our opinion risks for the EUR/USD are to the upside from here. The nearest important resistance level is 1.1049 (76.4% retrace of the 1.0952 to 1.1366 rise). We got long at 1.0985 (short-term strategy) in the morning of today’s session in Europe. Breaking the above-mentioned level will open the way to our target at 1.1120. The long-term EUR/USD strategy is unclear and we do not exclude switching to the short position in the area of 1.1120/60.

GBP/USD Near Lows, Hurt By Politics

• The GBP traded below 1.2200 vs. the USD on Monday and weakened against the EUR, hurt by sell-off in gilts and media reports of disagreements between the finance minister and his cabinet colleagues over the terms of Britain's exit from the EU. The Daily Telegraph said Phillip Hammond could quit his post after he was excluded from government meetings because he criticised the "hard" Brexit stance of Prime Minister Theresa May. Although the Treasury denied that Hammond will quit, it did little to instill confidence in the pound.

• Bank of England deputy governor Ben Broadbent said the weakness in sterling could cause inflation to overshoot its 2% target but that tightening monetary policy would have "undesirable consequences". BoE governor Mark Carney said he was willing to allow inflation to run "a bit" higher than the central bank's 2% target to help employment and allow Britain's economy to grow.

• The GBP/USD volatility may be high in the coming session given diverging lower and upper Bollinger-bands. The overall structure remains bearish, but a recovery cannot be excluded in the near term.  We stay flat now and will be looking to sell the GBP/USD near 14-day ema.