Currency Markets Eye Central Bank Comments for Direction Cues

Talking Points:

Euro Looks to ECB Officials’ Remarks for Operation Clues on QE Expansion
US Dollar, Pound May Rise if Fed and BOE Comments Fuel Rate Hike Bets
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Another quiet day on the economic data front puts central bank commentary back in the spotlight. First, traders will have an opportunity to update ECB stimulus expansion bets as scheduled remarks from Daniele Nouy, Jens Weidmann and Benoit Coeure cross the wires. ECB President Mario Draghi hinted that expanded policy support may be announced next month but offered no practical specifics.

The markets are now wondering if officials will opt for something relatively restrained or commit to a big-splash gesture. The former could be a broadening the range of QE-eligible assets or extending the existing effort beyond its September 2016 expiry. The latter may take the form of increasing the size of asset purchases from the current €60 billion/month or even moving the deposit rate deeper into negative territory. Rhetoric hinting a preference for stronger action is likely to bode ill for the Euro (and vice versa).

Turning to the Bank of England, comments from Deputy Governor Jon Cunliffe may help decipher conflicting cues emerging in recent weeks. Traders took the downgrade in BOE growth and inflation bets delivered in last week’s quarterly Inflation Report as a sign that tightening has been delayed, pushing the British Pound sharply lower. Comments coyly supporting mid-2016 “liftoff” bets from Governor Mark Carney have muddied the waters however and more of the same from Mr. Cunliffe may help Sterling recover some lost ground.

Finally, the spotlight moves to the Federal Reserve and comments from the President of the central bank’s Chicago branch, Charles Evans. A perennial dove, Mr. Evans has previously spoken out against the start of rate hikes in 2015. Fellow accommodation enthusiast Eric Rosengren of the Boston Fed appears to have changed his mind however, saying that tightening in December seems appropriate. The US Dollar may soar anew if Evans – a voter on the current FOMC committee – appears to have a similar change of heart.

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