Greenback giving it back

It is not rare nowadays that we see consecutive down days for the USD, and the greenback is set for its third week of declines despite a bit of a fightback in the past 24 hours. In fact, is it really dollar strength or a cessation of stuff being bought against it? As we have highlighted recently, traders have cottoned on to the run higher in the euro and are testing the European Central Bank’s resolve.

EURUSD at 1.15 has never been an overt barrier for the ECB but traders have long used it as a line in the sand. Only this morning, as EURUSD rubbed up against the 1.15 level, Ewald Nowotny – President of the National Bank of Austria – came out and said that the “ECB is clearly missing its inflation target” and that it may “need an additional set of instruments, including structural tools”.

It subsequently fell.

Draghi to fight back

In my opinion we will see the European Central Bank push back on these euro longs at next week’s policy meeting. Draghi has spent most of this year talking down the euro; fears over the tightened monetary conditions that a stronger currency would bring should ensure that Draghi does not deviate from that message anytime soon. The meeting takes place on Thursday.

US inflation also helped out marginally by showing a resilient core component. Headline inflation dipped on energy – as is its want – but shelter, transport and medical services all saw decent price increases, which suggests that there is a broad base to price rises, and energy declines – once out of the basket – will bring headline CPI higher.

Initial jobless claims – the number of people claiming unemployment insurance – falling to post-recession lows will have also helped the USD.

USD is mispriced at current levels

I really do think that the markets are mispricing the chances of a rate hike by the Federal Reserve in December – currently sitting at a 30.4% probability – and that further USD strength will be seen as we move through the end of the year.

Elsewhere the Japanese yen has continued to benefit from haven flows as markets deal with an overly soft risk sentiment profile at the moment. Traders and strategists are still confident that an additional sell-off in JPY will occur as BOJ Governor Kuroda pulls out another run of asset purchases at the end of this month. Shy away and we will see a broad-based buying of the JPY that will drive EURUSD higher as well.

The day ahead

This afternoon’s US industrial production numbers are the highlight of a quiet session although US consumer confidence may continue the USD decline into the weekend.

Have a great day and a better weekend.

PS. Rugby World Cup thoughts – Wins for Wales, New Zealand, Argentina and Australia

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