The currency market, as basically all other markets, have entered a new phase of increased volatility which will remain up until the Fed’s meeting on November 2-3. Therefore, we believe that the US dollar may strengthen its positions against euro and the British pound, and WTI with S&P500 may reach somewhat lower price levels.
As for the key topics on Wednesday, we emphasize the publication of Beige Book outlook in the US at 20:00 cet in the context of which an assessment of the US economy situation will be given. We are not expecting any new negative comments from the Fed’s Chairman about the situation in the US; thus, we presume that the Beige Book outlook may support the US dollar at time of its publication since it will once again force speculators to doubt significant expansion of the quantitative easing program in the US. In addition, of certain interest will be the speech of the President of Federal Reserve Bank in Richmond Jeffrey Lacker on October 20.
December futures for the price of the 10-year US Government Notes (CBOT)
US yield curve (Federal funds futures, CBOT, %)
The situation on the federal funds futures market seems to have stabilized during the past trading days. At least we don’t see a further rapid downward shift in the US yield curve, which means that speculators are not trying to outplay the second round of QE while realizing that everything is already priced-in. In this regard, any shift of the yield curve upwards may be a signal that there won’t be any significant easing of the monetary policy in the US. This, in turn, may cause a further appreciation of the US dollar.
Eurozone yield curve (3M, Eurex)
Both the Euribor futures and the spread between the 2-year German and US government bonds are rather clearly indicating that the market is expecting strong signals from ECB towards normalization of the monetary policy and a rate hike in the European region in 2011. The given factor as well as a subsequent improvement in the sovereign debt markets of Greece, Portugal, Ireland and Spain may in the end significantly support the EUR/USD pair on Forex.
UK yield curve (3M Sterling, %)
The destiny of the British currency in the GBP/USD pair and the cross-rates will be determined today after the publication of meeting “minutes” at 10:30 cet. Quite decisive will also be the report by the UK Finance Minister George Osborne on the country’s budget (spending cuts). If the BoE “minutes” indicate a rise in the number FOMC members supporting the asset repurchase program, we may well see a recurring decline in GBP/USD down to 1.5350. Namely, we believe that the downside risks are rather high at the moment, taking into account the comments of Mervyn King on significant inflationary pressure due to the worsening situation in the economy. Such kind of sentiment presumes a possibility of “printing press” resumption in the UK.
Konstantin Bochkarev, currency strategist
of company Admiral Markets.
At any use of the analytical material taken from a site of company Admiral Markets, and the secondary publication on any other resources, the rights to intellectual property for a dealing centre «Admiral Markets», the reference to a company site is obligatory.