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    European Session – Euro comes under pressure on expectations of ECB deposit rate cut

    The dollar softened slightly from Friday’s payrolls driven-strength, allowing the euro and the pound to reclaim some losses but against the yen, the dollar continued to rise on Monday.

    The greenback reached its strongest level in more than six months on Friday versus the euro as the strong US jobs report opened the door for the Federal Reserve to increase interest rates when it meets in December. Following the NFP report which showed 271,000 jobs added in October, the futures markets now indicate there’s a 70% chance of a Fed rate hike in December.

    The economic calendar was light today but news regarding a deposit rate cut by the European Central Bank in December caused the euro to lose all of its gains made against the dollar during today’s European session.

    A report was released suggesting that the ECB would prefer a bigger deposit rate cut in December as opposed to expanding QE. Some ECB Governing Council members indicated they were in favour of cutting the main deposit rate deeper into negative territory in December. The deposit rate is the interest rate the EBC charges Eurozone banks to deposit money at the central bank.

    Markets are pricing in a minimum 10 basis point rate cut but some ECB policy makers are hinting there could be a larger cut that would take the current deposit rate of -0.2% to perhaps even -0.7%.

    The euro fell in reaction to these reports, dropping to 1.0734 after having reached as high as 1.0789.

    Sterling bounced slightly against the dollar after Friday’s post-NFP drop to 1.5027. The pound had also weakened on Thursday after the Bank of England’s more dovish tone. After breaching key support of 1.5100, cable remains capped below this level. Focus now turns to Wednesday’s UK employment report.

    The dollar continued to remain bullish against the yen, driven by growing policy divergence between the Fed and the Bank of Japan. The dollar peaked at a high of 123.59 yen, the highest since August 20. The dollar eased to 123.25 yen early in the US session.

    News out in the North American session included Canadian housing starts which slipped in October from a strong level in September. The CMHC report showed a drop to 198,065 last month from an upwardly revised 231,304 in September. Forecasters had expected 200,000 starts. The softer data allowed the greenback to halt its decline against the Canadian dollar and stopped at a low of 1.3244. On Friday, the dollar rallied versus the loonie to 1.3317.

    The aussie traded between 0.7040 and 0.7069 in Europe. Inflation data out of China tomorrow will come into focus as China is a major trading partner for Australia.

    Commodities remained under pressure from the strong dollar. Gold breached a key level of 1100 on Friday and touched as low as 1085.35 after the NFP data. The precious metal mainly consolidated around this low today. Oil struggled below $45 and fell to $44.02, marking a new November low.

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