US Dollar Bounces & Aussie Dollar Gains

Sterling posts losses across the board

Sterling's week high of over $1.22 vs the Dollar and €1.15 vs the Euro were quickly wiped out yesterday as the Pound posted losses across the board. The UK currency was last down 0.72% at $1.2161 and €1.1470. Britain's businesses reported another decline in activity this month and cost pressures cooled further, surveys showed yesterday, underlining the risk of recession. Elsewhere, Sterling was also under pressure against a rallying Aussie Dollar, as the Australian currency strengthened on the likelihood of interest rate hikes after a surprisingly strong inflation print. The Aussie gained as much as 0.7% today after data showed the country's consumer price index rising 1.2% in the third quarter, above market forecasts of 1.1% and up from a 0.8% increase the previous quarter. That left traders narrowing the odds on a possible rate increase by the Reserve Bank of Australia (RBA) next month, which would come after four rate pauses. The Bank of England is due to set interest rates on Thursday next week, after the Fed's decision on Wednesday. The European Central Bank's meeting ends this Thursday, with traders expecting all three central banks to hold rates steady.

No major data.

EUR: Dovish signals mount

The last two pieces of Eurozone data before tomorrow’s European Central Bank meeting helped the case for a pause and endorsed the perceived dovish tilt that emerged at the September announcement. A decline in both manufacturing and service PMIs now raises the chances that the Eurozone’s stagnation will morph into a technical recession. The ECB Bank Lending Survey, also released yesterday, showed that weaker economic conditions and higher interest rates have had a clear impact on borrowing. Credit standards were tightened in 3Q, and banks expect to tighten them further in 4Q. Demand for borrowing also declined in 3Q in line with higher rates. All these are indications that the ECB’s tightening is being passed through to the economy effectively and argue against further hikes at this stage. EUR/USD may have lost the upward correction momentum after yesterday’s PMIs and could stay under some pressure on expectations that the ECB may have to sound more dovish tomorrow given the deteriorating economic outlook.

Data 09.00: German Ifo Business Climate expected 85.9 from 85.7. Speaker 18.00: ECB President Lagarde.

USD: Positioning adjustment over?

The Dollar drew support yesterday from a survey showing U.S. business pulling out of a five month contraction. The process of rebalancing in overbought Dollar positions was reversed as PMIs highlighted once again the widening growth gap between the US and other key developed areas of the world. Yesterday’s moves probably suggest that some of the recent resilience in EUR/USD, in spite of rising US yields, was linked to some tentative hopes that the pessimistic Eurozone data might have bottomed out. The US PMIs came in on the strong side, with both the manufacturing and services gauges rising despite higher rates and oil prices. Cable gave up over a cent to send GBP/USD back under the $1.22 handle.

Data 15.00: New Home Sales expected 678k from 675k. Speaker 21.35: Fed Chair Powell.