The USD enjoyed a late rally in yesterday’s US session, after Chicago Fed President Evans revealed his interpretation of the “extended period” term used in recent FOMC minutes - and it was a markedly less dovish interpretation than the market had assumed. The phrase, which refers to the duration of the “exceptionally low” rate environment in the US, has become a central tenet of structural USD weakness; but while the market has largely adopted the view that the “extended period” refers to most of 2010, he stated: “to me that seems like about three to four meetings”. He did however reiterate that unemployment could be higher next year and that inflation should continue to be subdued. EURUSD managed to survive the sell-off to hold above 1.4260 overnight (allowing it to recover above 1.4320this morning), but gold has slumped below $1100 levels, and USDJPY punched through its major technical level on the topside at 91.00. The technical picture for most currency pairs is now tilting to favour further USD-strength, and with the patchy liquidity over the holidays we remain vigilant of exaggerated moves and break-outs in patchy liquidity.
The absence of new sovereign debt concerns has allowed risk appetite to stabilize this week, meaning equity indices across Europe and the US maintained their strong gains into the close, and Asian indices this morning are broadly higher as well. Sentiment was also propped up slightly by headlines overnight that the ECB’s Orphanides expects the Greek government to take necessary action, and that fears of a Eurozone break up were “unfounded”.
The main data release from the US today will be the third estimate of Q3 GDP which is expected to remain at 2.8% annualized QoQ; however there are some outside bets for a further revision lower to 2.7%. In contrast, we will also get the third and final reading of UK GDP, where analysts are looking for an upward revision from -0.3% QoQ to -0.1% QoQ. The fact that the UK remains the only G20 nation yet to emerge from recession has weighed heavily on the GBP; obviously, an upward surprise in this figure would be a significant GBP-positive. Nevertheless, with a large upward revision already priced in, we feel there is little scope for a positive surprise, and indeed the newfound appeal of the USD means that GBPUSD will probably sell-off if the improvements in the data are not realized.
We also look towards the OPEC meeting scheduled today; there are not anticipated to be any changes to output targets, but oil has rallied strongly in the days leading up to this meeting, and we remain wary that these prices have a significant bearing on the inflation outlook for most economies.
G10 Advancers and Decliners vs USD