EUR/USD lacks direction as political uncertainties persist
Since the beginning of the week, US rates have finally taken a breather in the aftermath of a violent equity sell-off. The 2-year treasury yield traded in a tight range – between 2.82% and 2.87% – as investors take a step back to revaluate the rate outlook. On the longer end of the curve, the 10-year yield moved between 3.14% and 3.18%. Market participants will be able to get further information on the Fed thinking this afternoon as the minutes of the September FOMC meeting are due release later today. Back in June, it wasn’t clear whether the Fed would go with four or three rate hikes this year. In light, of the last FOMC meeting it looks like the market will get its fourth hike finally. In our opinion, the market is done pricing this eventuality and is now hoping to get some hints from the ECB.
Indeed, even though market participants might get further clarity from Fed minutes, which we doubt, the attention will now start to shift towards the upcoming ECB meeting that will take place next week (October 25). The September ECB minutes showed that European policymakers were concern by a potential slow-down in growth, mostly due to rising trade tensions. Investors have high expectations for next week meeting. In the absence of clear driver, EUR/USD has been trading sideways since the beginning of the week and should continue on that road until next week. Meanwhile, investors will keep an eye on both Brexit and Italy’s budget developments.
Brexit running short
The European Council Meeting in Brussels starts today and Brexit negotiations will resume at night. Now the arrangement lies in the hands of all 27 EU members that will vote tomorrow. Further progress today is not expected. However, the likelihood is of an extension to a special Brexit summit by November. US officials have also affirmed their interest to make a trade deal with the UK once the Brexit case is solved.
Accordingly, EU chief negotiator Barnier offered an extension of the transition period by 21 months, along with a two-tier backstop, which would allow both the UK and Northern Ireland to remain in the Customs Union in the case of a no-deal. This would allow more time for an EU–UK trade relationship to be built while avoiding a particular arrangement for Northern Ireland.
For now, the USD/GBP is expected to trade lower, as uncertainties continue to spread across the marketplace. A bounce could be practicable in the announcement of an extension. Today’s September data are expected to show a slowdown in inflation, which is expected to be published at 2.60% (prior: 2.70%). GBP/USD is currently trading at 1.3150, approaching the 1.3140 range.
