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  • richard evans

US GDP today could offer further support to USD, eyes also on ECB

Good morning

Well that spell of USD weakness a couple of days ago didn’t last long. GBPUSD slipped back to 1.2070 this morning, EURUSD to 1.0530, both just a few pips off those lows as I type. GBP suffers most with GBPEUR back down to 1.1460. Higher US yields and report of Israeli ground operations in Gaza help push the dollar higher. It was also higher against yen, USDJPY broke through 150.00 to hit 150.75, at which point the pair reversed to 149.85. Whether this was intervention or just mild panic isn’t yet known although it has managed to regain 150 and now trades 150.50.

I remember BoA just a couple of weeks ago saying USDJPY could hit 160-165 if US don’t cut rates and Japan continue with their easy monetary policy. Japan might be able to fight short term moves but it is nigh-on impossible to go completely against the trend. I wonder if BoA will be right. Mind you I’ll probably press ‘send’ and then see large-scale intervention, such is my luck in trying to work out where USDJPY will head.

BoC left rates unchanged yesterday as expected. There was little reaction in the currency markets but this morning USD strength has taken USDCAD to 1.3820 putting the 1.3800 call I mentioned yesterday marginally in the money. I’ll keep an eye on it and perhaps any buyers would consider selling a partial amount of spot against the option if we see 1.3830. This would be enough to at least guarantee break even.

Gold is taking advantage of geopolitical concerns once again, trading up to $1988 this morning, bear in mind this comes as the USD is pretty strong overall. As I said last week, a test of $2000 looks on the cards unless we see a de-escalation in the Middle East. A one month (28 Nov) $2000 gold call costs $35/oz. Add it a 2075 knock out and the price comes down to $9/oz. These two options are quite different despite looking similar on the face of it. The price obviously is a key factor but the barrier does affect our ability to manage and hedge the position. The lower price makes it more of a ‘fire and forget’ trade, or a lottery ticket. Come back to it an a month and see where we are.

Turkey’s Erdogan sent Turkish markets lower when he said yesterday that Hamas was not a terrorist organisation. USDTRY is up at 28.15 despite attempts by Turket to support TRY, most notably back in August when USDTRY fell from 27.20 to 25.20. That didn’t last long. CBRT rate announcement today where a 5% rise from 30 to 35% is expected. Not sure that TRY will feel the benefit of that.

As if there isn’t enough conflict in the world right now, tensions between China and Philippines are rising after a collision between a Filipino boat and a Chinese coast guard vessel. China claim a huge part of the South China Sea as their own, despite the Hague ruling their claims had no basis. Biden has said he will support Philippines if need be. Doubt China will pay any attention.

Focus likely to be on ECB rate decision this afternoon. Lagarde yesterday said their fight against inflation is far from over but Is confident it will eventually drift back to 2%. While she made it clear ECB were ‘not done yet’ ECB are widely expected to keep rates unchanged at todays meeting and it would be surprising if Lagarde was particularly hawkish in the press conference. We may see some tweaking of the reinvestment from asset purchases under PEPP. However December is regarded as the key meeting so while we may see a mention of PEPP policy we may need to wait until December to see any major decisions made.

Between the ECB announcement and the press conference we have US GDP which is expected to be strong, but just how strong remains to be seen. Consensus is for a quarterly figure around 4.5% but I have seen a few banks looking for something above 5%. The higher the number the greater the risk of further USD upside. An overnight 1.0525 EURUSD put costs 20 usd pips, just in case we have a perfect storm of dovish ECB and strong USD data.

After the suffering we have all seen in the news and social media from both Israel and Gaza, it is with increased sadness that I read this morning of another mass-shooting in the US. The suspect is still at large, reports suggest over 20 people have been killed and many more injured. The world is in an odd place right now.

- 12.00 CBRT rate announcement

- 13.15 ECB rate announcement

- 13.30 US GDP, durable goods, PCE, initial jobless claims

- 13.45 ECB press conference

- 14.00 Feds Waller speaks

- 15.00 US pending home sales

- 17.45 BoEs Cunliffe speaks

- 00.30 Japan Tokyo CPI

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