Euro, US Dollar Outlook Hinges on Fed and ECB Commentary

Talking Points:

Euro, US Dollar Focused on Comments from Leading Fed and ECB Officials
Australian Dollar Soars as Impressive Jobs Report Cools RBA Rate Cut Bets
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Central bank commentary dominates the spotlight in European trading hours. ECB President Mario Draghi is due to testify in the EU Parliament. A long list of Fed speakers including Chair Yellen, Vice Chair Fischer as well as branch Presidents Bullard, Lacker and Evans and Dudley is also on tap. Traders will comb through the remarks for clues about on-coming ECB stimulus expansion and a Fed rate hike in December.

For the ECB, the markets wonder if officials will opt for something restrained or a big-splash gesture. The former could be a broader range of QE-eligible assets or an extension of QE beyond September 2016. The latter may mean asset purchases larger than €60/month or a more negative deposit rate. Signaling a preference for the lighter touch may boost the Euro while an aggressive posture threatens to put it under pressure.

Turning to the Fed, the policy preferences of most scheduled speakers is widely known at this point. Resignation to imminent “liftoff” on the part of a dove like Mr Evans (as was the case with similarly-minded Eric Rosengren earlier in the week) may go a long way however, sending the US Dollar higher. As it stands, Fed funds futures imply a 67.8 percent priced-in probability for a 25bps rate hike in December.

The Australian Dollar soared following the release of dramatically better-than-expected Employment report. The economy added a net 58.6k jobs in October, dwarfing economists’ forecasts calling for a 15k increase and producing the largest monthly increase in since March 2012. The jobless rate dropped to 5.9 percent, the lowest in 19 months.

The currency pushed higher alongside a surge in front-end bond yields, suggesting the upbeat report undermined RBA easing speculation. Indeed, the priced-in probability of a rate cut at next month’s meeting has plunged to less than 20 percent from 67 percent at the end of last week.

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