Dollar Paring Gains, Euro and Sterling Mildly Higher

Dollar is paring some gains today but it remains the strongest major currency for the week so far. While bond yields remains firm today, the greenback is losing some momentum. Euro and Sterling are trading firmer while commodity currencies remain weak. Released from US, initial jobless claims rose 12k to 272k in the week ended September 23, above expectation of 269k. Continuing claims dropped -45k to 1.93m in the week ended September 16. Trade deficit narrowed to USD -62.9b in August. Wholesale inventories rose 1.0% in August. Q2 GDP was revised up to 3.1% with price index unchanged at 1.0%.

US President Donald Trump’s plan of cut in corporate tax rate from 35% to 20% and top individual tax rate from 39.5% to 35% are generally welcomed. But the plan itself is already drawing criticisms from top Democrats, as Bernie Sanders called it "morally repugnant" for benefiting the "wealthiest people and most profitable corporations in this country." Politics aside, there are questions on how the government could recoup the loss revenue. Without a plan, the tax cut could indeed be translated into small infrastructure spending. But overall, for now, more upside is still in favor for the Dollar.

ECB Praet: It’s readjusting, not ending of stimulus

ECB Chief Economist Peter Praet emphasized today that the central bank will discuss adjusting monetary stimulus, not ending. He also repeated President Mario Draghi’s wording of "re-calibration". Praet noted that "things are going on the real (economy) side much, much better", but the "job is not yet done". There are talks that ECB could announce to lower the current EUR 60b a month asset purchase target to EUR 40b a month starting next year.

Separately, ECB Governing Council member Francois Villeroy de Galhau is confident that the current recovery in economy and job market would push up inflation. But the question is how long that would take. And while policy makers "must reduce the intensity of our net asset purchases", they should also "keep overall our monetary policy significantly accommodative".

Another Governing Council member Erkki Liikanen said that for now "a very substantial degree of monetary accommodation is still needed in the euro area for underlying inflation pressures to gradually build up". He pointed to the fact that "global weight of the advanced economists has decreased". However, he also singled out that "a stronger than forecast deceleration in China’s debt driven growth would weaken confidence globally and significantly dampen growth".

Release from Eurozone, German CPI CPI rose 0.1% mom 1.8% yoy in September, in line with expectation. Looking at the details, inflation in some German region has risen above ECB’s target. In the state of Hesse, headline CPI surged to 2.1% yoy. CPI in Saxony rose to 2.0% yoy. Meanwhile, CPI in the most populous state of North Rhine-Westphalia was unchanged at 1.9% yoy. Also from Germany, Gfk consumer confidence dropped to 10.8 in October, down from 0.9, below expectation of 11.0.

Eurozone confidence indicators generally improved in September. Business climate rose to 1.34, up from 1.08 and beat expectation of 1.12. Economic confidence rose to 113.0, up from 111.9, beat expectation of 112.0. Industrial confidence rose to 6.6 up from 5.0 and beat expectation of 5.1. Services confidence rose to 15.3, up from 15.1 and beat expectation of 15.0. Consumer confidence was finalized at -1.2.

Carney said BoE can’t nullify Brexit impacts

BoE Governor Mark Carney said today that the central is unable to nullify the economic impact of Brexit. Carney pointed out that "the biggest determinants of the UK’s medium-term prosperity will be the country’s new relationship with the EU and the reforms it catalyses." And, "monetary policy cannot prevent the weaker real income growth likely to accompany the transition to new trading arrangements with the EU." And Carney added that "carefully circumscribed independence is highly effective in delivering price and financial stability." However, BoE "cannot deliver lasting prosperity and it cannot solve broader societal challenges." 

BoE Chief Economist Andy Haldane said today that majority of the MPC members are "nearing the point" to hike interest rate. And he emphasized the positive side of it. He noted that "this would be a sign of the economy healing, and therefore adjusting to that healing process." Therefore, "rather than being a source of fear or trepidation, this ought to be a good news story about the economy proving resilient." Haldane’s comments affirm the expectation of a rate hike by BoE in near term, possibly in November.

Brexit talks need months to move to next stage

Staying in UK, Brexit Secretary David Davis said that "decisive steps forward" were made in the latest round of negotiations with EU. He hailed that "this round was a vital one". And Davis urged EU officials to be pragmatic with the talks. EU negotiator Michel Barnier said "we have had a constructive week". However, Barnier emphasized that "further work is needed in coming weeks and coming months" on the resolving the standout issues.

Barnier acknowledged the "new dynamic" created by UK Prime Minister Theresa May’s speech in Florence last week. And there were progress made on citizen rights. However, Barnier said UK is not in a position to identify its financial commitments to EU yet. And Barnier emphasized that "for the EU, the only way to reach sufficient progress is that all commitments taken at 28 are honoured at 28."

Kiwi stays weak after RBNZ stands pat

New Zealand Dollar remains the weakest one for the week after RBNZ rate decision. As widely anticipated, RBNZ left the OCR unchanged at 1.75% in September Policymakers downgraded the domestic growth outlook and suggested that the accommodative monetary policy would stay for a ‘considerable period’. Thanks to the recent decline in New Zealand, driven by heightened political uncertainty, RBNZ tweaked its warning over currency strength. It noted that a lower exchange rate would "would help" raise tradables inflation. We expect RBNZ to keep the policy rate unchanged for the rest of the year, and likely through 2018. More in RBNZ Downgrades Growth Outlook While Keeping OCR At 1.75%

BoJ Kuroda cautiously upbeat on economy

BoJ Governor Haruhiko Kuroda reiterated his cautiously upbeat view on the economy. He expects expansions to be well balanced and are broadening He expressed confidence that recovery is likely to be highly sustainable. However, the question remains on the fact that "despite an expanding economy, prices continue to hover on a weak note." And therefore, BoJ is still committed to the massive stimulus program in form of yield curve control framework. It will still take much time for Japan to hit 2% inflation target.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3347; (P) 1.3403; (R1) 1.3444; More….

GBP/USD recovers mildly today but it’s staying in corrective pattern from 1.3651. Intraday bias remains neutral first. We’d continue to expect strong support from 38.2% retracement of 1.2773 to 1.3651 at 1.3316 to contain downside and bring rally resumption. Break of 1.3651 will turn bias back to the upside for 1.3835 support turned resistance next. Break there will target 55 month EMA (now at 1.4405).

In the bigger picture, current development argues that the long term trend in GBP/USD has reversed. That is, a key bottom was formed back in 1.1946 on bullish convergence condition in monthly MACD. Current rise from 1.1946 will target 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466 next. In any case, medium term outlook will now stay bull

Economic Indicators Update