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Forex: Struggling to return to normal

There’s no doubt that a calmer tone has emerged in markets this week. Stocks have recovered for most of the week and the spike higher in forward volatility measures seen in both FX and even more so in equities have been partially reversed. This has also allowed the dollar to recover from the mid-October lows (dollar index), naturally helped by the move higher in US 2 year yields, from the low just above 0.30% to around 0.38% now. But the dynamics are not powerful enough to re-establish the trends of Q3. In the Eurozone, we saw a mix of data on Thursday, preliminary PMIs showing weaker than expected readings in France, but better readings for Germany. This managed to put some power behind the single currency, but it proved to be largely fleeting in nature. It was against the yen that dollar strength was most in evidence, naturally helped by the better tone to stocks that has been in evidence so far this week.

For today, the focus remains on growth with the release of UK GDP data. This is the first reading for Q3 and is expected to show the quarterly growth rate fall from 0.9% to 0.7%. The UK economy has outperformed in recent quarters, both compared to Europe and also against its G10 counterparts. But compared to three months ago, the impact of this on the currency has changed dramatically. Back then, the market was gearing up for a potential rate increase before year end. Now, with slower growth globally and especially in Europe, this is not the case, with inflation having also fallen quicker than anticipated by the Bank of England. For sterling, the scope for further losses remains in place, but with rate increases now expected to start in August next year, it has largely priced-in this changed scenario. We nudged very briefly below the 1.60 level on cable yesterday, so that will remain the initial support level for today. Just US home sales data to watch later on at 14:00 GMT, with Eurozone bank stress tests (released Sunday) potentially impacting the euro early on Monday.

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