Compared to the volatility seen Monday, yesterday was a much calmer day in markets. That said, there was an underlying bid tone to the dollar, which was most prevalent against the pound, with cable pushing back below the 1.27 level into the European close. The single currency was not that far behind, touching the 1.07 level on EURUSD before recovering modestly thereafter. The ranges have been very tight overnight, reflecting the fact that the main risk events of the year have now passed and markets are falling into a liquidity constrained slumber in December.
Tomorrow’s ECB meeting could be the exception to this rule, although it is widely expected that Draghi will extent the current ECB QE program beyond the projected end date of March next year to mid-year. This is the softest and easiest way to continue measures to support the economy. The impact on the economy may be limited though, given that the move has been widely anticipated. Thereafter, the Fed meeting next week will be of interest only for the statement, given that a tightening is now fully priced in and would not upset the market. The Fed will also release its latest projections for rates for the future, the so-called ‘dot-plot’, which are more likely to impact the dollar, especially if they endorse the view in the market of more tightening to come next year.