Reversing the wall of worry

Things are a lot easier when they are moving in straight lines. This has not proved to be the case so far during October. Just when the dollar looked as if it was going to roll-over for a breather, better than expected claims data came along, together with further pledges from ECB President Draghi to expand stimulus measures should conditions warrant. Equity markets, having celebrated the dovish Fed on Wednesday, seemed to decide Eurozone weakness was not such a good thing, the S&P seeing its largest 1 day percentage decline since mid-April. This put a downer on EURUSD through the latter half of the European session, removing most of the post-FOMC minutes bounce seen late Wednesday. FX markets are in a more consolidative rather than corrective phase, at least on the charts, but underneath the perception remains that the Fed is still fearful of hinting at higher rates next year until they are fully convinced that they are warranted and that markets are strong enough for them to follow through on such a pledge.

The data calendar is relatively quiet for Friday, jobs data in Canada being the main exception to this. Note that G7 finance ministers and central bank governors are meeting in Washington, so there is risk for comments from them later in the day and over the weekend. The market will be keen to hear more on the dollar, given some concerns in the Fed minutes regarding the impact of the stronger currency on the economy, but in general it’s unlikely that we’re going to get much of a steer. Broadly, central bankers have little incentive to fight current trends in underlying currencies, with the Eurozone the most keen to seen their currency weaken further against the dollar.

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