October Update Forex Trading

The 20 October ECB meeting was interpreted as leaving open room for continued easy monetary policy, with no sudden tapering shocks seemingly in the pipeline. This contrasts with the apparent policy shifts underway in Japan and the US. Recent comments from ex-BOJ board member Shirai helped solidify a growing market suspicion that September’s BOJ move to cap rates was a first step towards winding down asset purchases in Japan. And in the US, the market seems willing to price in a December Fed rate hike despite suggestions from key officials like Yellen that they are still willing to look at the US economy glass as half empty. It seems rising inflation expectations and a tightening US labor market are enough to convince investors to continue leaning in favor of US rates trending higher.

One reason we have been hesitant in recent months to be too USD bullish vs. defensive currencies like EUR and JPY was the risk that the US election leads to a populist victory and USD-negative uncertainty. With the likelihood now high that the US political leadership will remain conventional after the election, we are prepared to lower the required risk premium for the USD now. As for the EUR, we have argued many times that where GBP goes, eventually EUR has to follow. Quite simply, we do not expect the triggering of Article 50 combined with French, Dutch and German elections in 2017 to leave the currency unscathed. Political risks are diverging again, in favor of USD and against EUR.

More Info: CLICK HERE