EUR/USD Euro-zone money-supply growth was slightly below expectations at an unchanged 4.9% in the year to September with private lending in line with expectations at 1.1% which still suggests some reluctance by companies to boost capital spending. There was a further retreat in German bond yields with 10-year rates dipping to near 0.45% and the lowest for five months which continued to sap underlying Euro support. There were reports from within the ECB council that there was a consensus within the council and that action was likely at the December meeting. Council member Coeure suggested the deposit rate could be cut if there is a risk that inflation move back towards 2% more slowly than expected. US durables goods data was close to expectations with a 1.2% decline for September while underlying orders dipped by 0.4% following a 0.2% retreat previously which suggests no significant improvement in investment plans. Consumer confidence was weaker than expected at 97.6 from a revised 102.6 previously while there was a weaker than expected services PMI reading of 54.4 from 55.1 previously. Other releases had a slightly more positive tinge with houseprice growth of 5.1% over the year and an improvement in the Richmond Fed manufacturing index. The data overall did little to shift expectations that the Federal Reserve would not increase interest rates at Wednesday’s FOMC decision. The statement will be watched very closely, although the most likely outcome is that the Fed will maintain the possibility of a December hike in order not to disrupt market expectations. A strong hint that rates will not be increased this year would undermine the currency. The Euro was unable to break above the 1.1080 area an drifted weaker without making a serious test on support near 1.1000 with markets braced for a possible breakout following the Fed statement.
JPY The dollar was unable to make any impression on the yen during Tuesday and tended to drift slightly lower into the New York open. There was a further dip lower following the US economic data with a dip to below 120.20 before some buying support emerged. There was caution ahead of Wednesday’s Federal Reserve statement and Friday’s Bank of Japan announcement. There were fears that the yen could strengthen sharply if the central bank failed to relax policy, especially as risk appetite would also be likely to deteriorate sharply. There were comments from PM Abe advisor Shibayama that it would not be strange for the bank to ease on Friday and the latest retail sales data was weaker than expected. The dollar found support at lower levels and edged towards 120.50 on Wednesday as narrow ranges prevailed.
GBP Sterling drifted lower in early Europe with some selling ahead of the economic data. Headline third-quarter preliminary GDP was slightly weaker than expected at 0.5% and the annual gain was also below expectations at 2.3%. Given that there had been robust services-sector expansion, there was further disappointment surrounding manufacturing and construction. This was countered by expectations that there could be upward revisions to the data. Bank of England MPC member Shafik stated that the rise in interest rates would be limited and at a gradual pace and there were further doubts whether the central bank would be prepared to consider an interest-rate increase ahead of the Federal Reserve which could cause major policy conflicts within the MPC. The Euro looked to consolidate a position above the 0.7200 level while there was a retreat to test support below 1.5300 against the dollar before a slight recovery.
CHF The franc remained on the defensive against major currencies on Tuesday as the Euro pushed to highs near 1.0900 despite wider vulnerability while the dollar pushed to 10-week highs around 0.9870 with no significant correction. The Swiss currency lost ground despite a firm tone for the Japanese yen and a decline in German bond yields also offered no support to the franc which again suggested the possibility that the National Bank was intervening in the market. Markets were braced for further volatility following the Fed statement on Wednesday.