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Risk has sold off yet again today but overall markets remain in fairly tight ranges. EURUSD is still managing to hold onto the key 1.30 handle as we reach lunchtime in the London session. After fairly neutral Spanish regional elections and no major outcome from the EU summit last week the market is looking for the next driver of the single currency. Tomorrow’s FOMC meeting is unlikely to spring any surprises after the announcement of QE3 at the September meeting. This leaves the PMI surveys for October, which are released tomorrow, as the most important near-term event risk for the euro. After declining to their lowest levels since 2009 in recent months, the surprise would be a positive reading. The market expects both the manufacturing and service sector October estimates to be in sub-50 contraction territory for this month, so if we get better than expected readings we could see some upside in EURUSD.

After that the ECB meeting on November 8th and also the regional elections in Catalonia at the end of November are the two key event risks for the single currency. Until then the market seems happy to pick up the euro on dips. There are two key short term support zones including 1.3030 – the 200-hr sma, and also 1.2990 trend line support (see the chart below). If we dip to this level then we believe this could attract some buying interest. From a technical perspective the uptrend does not end until we breach 1.2790 – the top of the daily Ichimoku cloud.

The BOC – dovishness already baked in

While EURUSD seems happy to trade in a low-vol range for the short-term at least, the action could be in USDCAD today. The Bank of Canada announces interest rates at 1400 BST/ 0900 ET. It is expected to leave interest rates on hold at 1%, however it is the statement that will be pivotal and tomorrow’s monetary policy report and press conference from BOC governor Carney. The CAD has declined as Carney’s rhetoric has got more and more dovish in recent weeks. Thus, it may take a surprise rate cut or even more extreme dovish rhetoric from Carney for the CAD to embark on another leg lower. On balance we believe the bigger risk is that the BOC are less dovish than expected. Carney has to walk a fine line between trying to protect the competitiveness of Canada’s exports to its largest trading partner - the US – especially now that the Fed has embarked on QE3; it also needs to be wary of deflationary pressures after annual CPI fell to 1.3% in September from 1.6% the month previously. On the other hand it must also try to avoid being accused of stoking a housing bubble thought to be unsustainable by some.

As we believe a lot of dovishness is already baked into the price of USDCAD we could see 0.9950 – 1.0000 act as a very sticky resistance zone, which is the 200-day sma and also the top of the daily Ichimoku cloud.

Watch the FOMC before embarking on USDJPY longs

The other pair to keep an eye on is USDJPY. This cross has picked up speed this morning and is testing the 80.00 level yet again. We expect this cross to trade in a range over the next week or so until the FOMC and BOJ meetings are out of the way. Relative interest rate differentials will be the biggest drivers of this cross in the coming weeks. If the FOMC remains cautious and supportive of open-ended QE at its meeting tomorrow then we could see USD gains capped. However, after recent weak growth signals in Japan, including the 10% drop in exports last month caused by the stand-off with China over a territorial dispute, then we could see the BOJ pump more stimuli into the economy at its October 30th   meeting. Some reports suggest this could be a whopping JPY 20 trillion, which is double the increase from a couple of months ago. If the BOJ is this aggressive next week then we could see USDJPY climb towards 82.00 in the medium term. Support lies at 79.20 then at 78.55 – the top of the daily Ichimoku cloud. 81.10 is capping gains for now. 

Today the BOC will be in focus along with Eurozone consumer confidence, which is released at 1500 BST/ 1000 ET, the market expects a decline to -25.9, the lowest level since mid-2009.

One to watch: EURUSD

This chart is still in an uptrend. The ascending triangle pattern suggests that 1.2990 should act as tough support, while 1.3150 remains resistance. As long as this support level holds, we remain constructive on this pair.

Chart 2: USDCAD:

0.9950 – 1.0000 is a stiff resistance zone and if the BOC is less dovish than the market expects over the next two days then we may see USDCAD give up some recent gains.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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