The three most traded Forex pairs in the world have seen substantial changes in their current behaviour compared to previous weeks. The three of them have been subject to political decisions rather than events merely market-related. As such, the EUR/USD is rising above 1.1400, setting the highest levels in a while. It is uncommon to see significant moves ahead of the Fed decision, but this time is different. Likewise, the GBP/USD is trading little changed on the upside at around 1.2650, bolstered by good news from Inflation rates. On major global markets, the USD/JPY, being traded at 112.36 per Japanese Yen, stands as an improved sign for global trade.
First of all, the Euro enjoys a substantial development. As it was first analysed on FX Street, Italy’s Radiocor reports that the European Commission will not open a disciplinary procedure against Italy. The latest budget from the euro zone’s third-largest economy already consisted of significant concessions towards Brussels. EU Commissioner Description Valdis Dombrovskis confirmed an agreement has been reached to avoid an Excessive Deficit Procedure (EDP).
“The issue has weighed on the common currency for a long time and now allows it to move higher. The spread between Italian 10-year bonds and the benchmark German ones fell below 260 basis points, indicating an acknowledgement by the markets,” said the media.
In parallel to Italy’s back up, the second reason for the EUR to rise is more speculative and may be premature. Markets seem to believe that the Fed will deliver a “dovish hike.” While Chair Jerome Powell and co. will raise rates but slash the forecast for three increases in 2019. The expectations are based on an economic slowdown but may have gone too far.
As the media pointed out, back in September, the Fed’s dot-lot showed three hikes and bond markets point to no changes next year. The low expectations weigh on the USD Dollar. The outcome may be something in the middle. A small downgrade to two hikes in 2019 could make the doves cry and send the greenback much higher. A cut to one hike would already be a genuine dovish hike.
The reaction also depends on the accompanying FOMC Statement and Powell’s press conference, making traders to wait until then.
Decelerating Inflation in the UK fails to make GBP more competitive against USD
The GBP/USD is trading little changed on the upside at around 1.2650 after being rejected at 1.2660-1.2700 region representing the confluence of the downward sloping trend-line resistance and the 23.6% Fibonacci retracement line on a daily chart. The news of the UK headline inflation decelerating in November to 2.3% y/y had no effect on the currency market with Sterling benefiting from the softer US Dollar as global growth outlook dims ahead of the expected rate hike by the Federal Reserve.
As it was first commented by the FX Street experts, the GBP/USD was not able to withstand the levels above 1.2660-1.2700 earlier this week even with the outlook for the US rate hike being increasingly dovish with the rebound in Sterling ahead of the Federal Reserve largely a factor of dovish market expectations from the monetary policy outlook from Fed.
“With the end of the year approaching, markets are nervous as global growth picture amid trade wars deteriorates. The Brexit uncertainty and fear of the UK parliament possibly rejecting the deal leaving the UK with no-deal Brexit that is the biggest drag on currency,” ended the media analysis.
USD/JPY remain a barometer of the global mood in markets, and the atmosphere has improved
Lastly, the third pair, the USD/JPY, being traded at 112.36, remained a barometer of the global mood in markets, and the atmosphere has definitely improved. The world’s largest economies got closer as China began buying US soybeans. Despite the small economic impact, farmers are critical to Trump’s base.
Moreover, Beijing is reportedly ready to change or postpone its China 2025 program, a thorn for American policymakers. The long-term plan includes Artificial Intelligence and robotics, and Washington is concerned about a loss of its technological hegemony.
Huawei CFO and the only child of the Chinese giant’s founder Meng Wanzhou was released on bail in Canada, another positive step. She was arrested upon a request by a US court. However, two former Canadian diplomats were detained in China, serving as a warning sign. All in all, markets advanced on the positive signs, and this weighed on the safe-haven yen.
Late in the week, disappointing economic data from China dampened the mood once again. The slowdown in industrial output and retail sales weighed on stocks but had a limited effect on the yen.