Euro Reversing On Rate Speculation, ECB Watched This Week

Sentiments towards Euro had a drastic turn last week. Broad based, steep selloff was seen in the common currency as much lower than expected inflation reading triggered speculations that ECB could cut interest rates from the current 0.50% historical low, as soon as this week. Weakness in Euro dragged down Sterling and Swiss Franc. On the other hand, dollar was lifted by less dovish than expected FOMC statement and strengthened against all other major currencies, except Canadian dollar. The loonie was boosted even further by stronger than expected GDP growth data. Yen, on the other hand, was mixed. In other markets, S&P 500 rose to new record high of 1761.64 before retreating. DOW also caught up and reached new record high of 15615.55.

Sharp moderation in flash Eurozone inflation in October raised speculations that the ECB would implement further easing measures at upcoming meetings. Meanwhile, the monetary condition has been tightened due to strong euro and a shrinking ECB balance. Some kinds of stimulus is urgently required to bolster the economic recovery. Yet, whether the tool would be reduction in policy rates or provision of liquidity remains uncertain. More in Weak Eurozone Inflation Outlook Raise Speculations Of Further ECB Easing.

The October FOMC statement released last week contained only few changes from the previous one. Policymakers decided to leave the Fed funds rate unchanged and maintained asset purchases at US$ 85B per month at the meeting. The Fed dropped the language of tightening in financial conditions and turned softer on the housing market. But most importantly, regarding tapering, the Fed did not rule out the possibility of this to be taking place in December. Yet, it noted that reduction of stimulus would only begin 'until the outlook for the labor market has improved substantially in a context of price stability'. More in Fed Softened On Housing Market, Left The Door Open On December Tapering.

It should be again noted that Fed's outlook will heavily depends on job market developments. The non-farm payroll report to be released this Friday is expected to show 125k growth in October with unemployment rate unchanged rose back to 7.3%. The ISM manufacturing index released on Friday posted an upside surprise last week to 56.4, highest since April 2011. However, the employment component dropped from 55.4 to 53.2, lowest since June. The ADP report also showed weaker than expected growth of 130k in private sectors jobs. Downside surprise in this week's NFP would reaffirm the expectation that Fed won't taper until March next year. And that would give dollar renewed selling pressure.

Technically, the EUR/USD's sharp fall last week raised the possibility of near term reversal. And that also dragged down euro in crosses. The EUR/JPY, the EUR/GBP and to a lesser extent, the EUR/AUD, looked vulnerable in near term. But overall, we'd prefer to see sustained break of 1.3720 support in the EUR/USD to confirm weakness. Yen cross remained very mixed. While Canadian dollar was strong, the case of reversal wasn't confirmed yet. Kiwi and Aussie was also firmer last week but there was no decisive buying seen yet.

Our strategy of long the USD/CAD to 1.05 just missed target with the USD/CAD topped at 1.0497. Meanwhile, the CAD/JPY didn't extend recent fall with mixed price actions in yen and strength of Canadian towards the end of the week. Both will be closed first. Instead, we'll wait for decisive break of 1.3720 in the EUR/USD this week to go short Euro. The EUR/USD is preferred based on the current picture and in that case, we'll target middle of the range of 1.3104/3451, i.e. around 1.33 to take profit. However, stops will be kept tight, in particular on Thursday ahead of the ECB announcement.