FX Report 1 November 2016

Good Morning;
the daily currency market report.
The German retail sales data was significantly weaker than expected, although there was evidence of seasonal distortions. Euro-zone CPI inflation data was in line with consensus forecasts as the headline inflation rate edged higher to 0.5% from 0.4% while the core rate was unchanged at 0.8%. The data will maintain concerns over a lack of upward pressure on underlying inflation and ECB comments will remain under close scrutiny ahead of next month’s crucial policy meeting. The US core PCE prices data also met expectations with the annual rate unchanged at 1.7% which will not have any major implications for Federal Reserve policies with the personal spending increase in line with expectations. The headline Chicago PMI index was weaker than expected with a headline figure of 50.6 for October from 54.2 the previous month, although there was an increase in inflation pressures which lessened the potential impact. The Euro found support below the 1.0950 level during the New York session and there was a rally back to the 1.0980 area with the US currency unable to gain any traction. Narrow ranges prevailed on Tuesday with Fed Funds futures still indicating a 75% chance of a 2016 rate hike and US yields edged higher ahead of the ISM manufacturing data due in US trading. Political uncertainty tended to deter dollar buying, although there was no evidence of any shift in Presidential opinion polls.
The dollar edged back above the 105.00 level during the European session and hit a peak just above 105.20 in US trading, although it was unable to sustain the gains. There was a sharp decline in oil prices which tended to support the Japanese currency while US equity markets were unable to make any significant headway with declines on European bourses.  As expected, the Bank of Japan left policy on hold at the latest policy meeting with the commitment to keeping long-term interest rates around zero while interest rates on some deposits was held at -0.1%. The bank lowered its inflation forecasts and pushed back the forecast to meeting its inflation forecast by 12 months to around fiscal 2018. The purchase of government bonds will also be held around JPY80trn per annum and there was a measured market reaction.  The Chinese PMI data was better than expected with the manufacturing index rising to 51.2 for October from 50.4 previously and the strongest figure since September 2014 while the non-manufacturing index also edged higher. The Caixin index hit the highest level since July 2014 which underpinned risk appetite and the dollar held just below 105.00 on reduced yen demand.
Sterling found support just below the 1.2150 against the dollar on Monday and the Euro also hit resistance above the 0.9000 level. The latest consumer lending data was unchanged from the previous month at £4.7bn which continued to suggest firm retail spending and reinforced expectations that there would not be any further near-term monetary policy easing. Sterling gained some fresh support once the London fix was completed as month-end selling eased. The UK currency pushed back above 1.2200 against the dollar with a further boost from the announcement that Bank of England Governor Carney had agreed to stay in his post until June 2019. Markets welcomed the fact that there would be stability until after the EU exit terms had been agreed and there was a move to near 1.2250 as the Euro retreated to 0.8970. The latest PMI manufacturing data will be watched closely on Tuesday with markets braced for a high degree of volatility over the next few days given domestic and international event risk with the currency holding firm on Tuesday.  .
The Euro found support on approach to the 1.0830 area against the franc on Monday and pushed to highs above 1.0860 as the single currency advanced slightly against the dollar. The US currency consolidated just below the 0.9900 level against the Swiss franc. There was further speculation that the National Bank would resist gains through 1.0800 against the Euro which limited the potential for franc buying. Any easing of US political uncertainty would also tend to limit the potential for franc buying on defensive grounds, especially given the favourable Chinese PMI data.
Regards All.

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