Week Ahead in Currencies

Major Headlines

• PBoC cuts lending rate first time in more than 2-years

• ECB stands ready to expand the stimulus program if inflation stays low- Draghi

• US CPI fails to fall below 1.7% YoY, despite fall in energy prices

• OPEC action more likely next week – Morgan Stanley

EUR - German GDP and Eurozone CPI under focus

The EUR got jawboned on the last trading session of the current week after the ECB head Mario Draghi indicated willingness to expand the current monetary stimulus if the inflation in the Eurozone continues to stay low. This effectively puts the next week’s Eurozone CPI and the German CPI release at the center stage. A further decline in the price pressures shall re-inforce the expectations of more monetary stimulus from the ECB, leading to a further fall in the EUR/USD. Moreover, it will take a far better-than-expected CPI print in Germany as well as the Eurozone to erase speculation of more stimulus measures.

View - The EUR is likely to be sold on rallies. Mr. Draghi’s dovish talk today along with multiple failure to rise above 1.26 levels on daily charts has effectively put a ceiling at 1.26 levels on the EUR/USD pair. On the downside, doors are open for 1.2350 and 1.2280 levels.

GBP – to outperform EUR, may turn out to be the best performer next week

The slightly hawkish tone of the Bank of England (BOE) minutes and the sharp rise in the UK retail sales pushed the GBP/USD back above 1.57 levels. Pound stands to be the biggest gainer if the third quarter GDP reading triggers the rate hike speculation in the UK. Even if the data does indicate a slight slowdown in the economic activity, Pound would still outperform the Euro. Except the UK GDP, the data docket is light for the next week. The trade balance data has been largely ignored by the markets for past one year and it is expected to be ignored in the next week as well. Moreovver, the Pound may turn out to be the best performer against the US Dollar next week, if the US Q3 GDP prints lower than the market expectation.

View – The EUR/GBP pair likely to fall to 0.78-0.7750 levels next week. Technically, the trend may change only above the 200-DMA located at 0.8052.

USD – weak GDP shall trigger a correction

The recent strength in the US Dollar has been more due to the dovish actions of BOJ, ECB and BOE. The treasury yields at the short-end and the long-end in the US traded lackluster in the range of 2.3% to 2.37% despite an uptick in the US CPI. However, the yields may slump in the next week if the US Q3 GDP data prints lower than market expectation of 3.2%. Moreover, it will take a surprisingly weak GDP number to convince markets that the Federal Reserve will not hike interest rates next year.

View - The US Dollar may start weakening against the majors if the ten—year yield slides below the 2.27% mark. In such a case, the yen may very well turn out to be the biggest gainer against the US Dollar.