The policy divergence play that is EURUSD was more stable at the early part of the week, this following on from the break below the 24th June low that has marked the major support point and especially over recent days. On the dollar side, expectations for a Fed rate hike in December continue to solidify, with the US 2Y yield creeping higher once again over the past week. There is probably some more momentum to go ahead of the December meeting. The US 2Y was above 1% ahead of the December meeting last year, although expectations for rate increases in the year ahead were more solid then versus now. With December now more than 70% priced, it’s expectations regarding rate hikes next year that are going to be more important for the dollar momentum. With regards to the single currency, the question is what Draghi can do in December that will push the single currency lower. By all accounts, the ECB’s options are limited on all currently live policy fronts, such as negative rates, asset purchases and related lending programs. As such, whilst policy divergence should be a powerful driving force of a currency pair, this may not prove to be the case with EURUSD. Tread carefully is the best approach.
For today, the data calendar is relatively light. Note that ECB President Draghi speaks later (15:30 GMT), with BoE’s Carney also scheduled to speak around 14:30 GMT. USDJPY continues the gradual crawl higher toward the 105.00 level, whilst cable volatility has continued to decline. The EuroStoxx has continued to crawl higher against the backdrop of more circumspect US equities.