Yesterday’s dollar weakness short-lived

Both the euro and sterling were able to claw back some lost ground against the dollar yesterday, but early signs are that they are set to give it back up again. 

ECB sign
Source: Bloomberg

EUR/USD below $1.18

Yesterday was an important one in the run up to the next European Central Bank meeting on 22 January. Currency markets have, to an extent, factored in some form of quantitative easing being announced. The most commonly heard expectation is for the ECB to have a €500 billion war chest at its disposal.

The European law courts give their assessment on the legality of the ECB’s actions to stimulate the eurozone to date yesterday. The comments were not the most fulsome ringing endorsements that you are likely to hear, but were nonetheless an approval of what has already taken place, specifically the asset-backed securities purchase scheme and the targeted long-term refinancing operation. This approval clears the way for the ECB to announce a QE policy if it chooses to.

EUR/USD saw a jump back up almost to the $1.1850 level but this was short-lived, and trading this morning is once again below the $1.18 level. The closer we get to this date the more inflammatory comments from finance ministers are likely to be, and increased volatility seems inevitable. The first up to give their opinion will be German Buba president Jens Weidmann, who is due to give a speech tonight on ‘the outlook for the new year’.

This afternoon’s heavy session of US economic data could trigger fresh selling, regardless of the fact that it is already oversold.

Cable traders await glut of US data

The Bank of England governor Mark Carney testified yesterday at the Treasury Select Committee’s Financial Stability Report. It is difficult to say if the markets actually gleaned anything of real value from this.

Once again Mr Carney operated very smoothly under political duress, but there was nothing new as far as assessing the timeline for change to the UK’s interest rate. The consensus in currency markets is for a change around the end of the first quarter of 2016, and considering the issues facing the eurozone (the UK’s largest trade partner) an earlier date is looking a little unlikely.

Yesterday saw a bounce in GBP/USD but this afternoon will see a range of US economic data being released, from PPI to Empire State manufacturing and the Philadelphia Federal Reserve manufacturing index.

This morning has so far seen GBP/USD moving back towards testing the 50-, 100- and 200-hour moving averages, all bunched around the $1.5170 level. 

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