G10 currencies in holding pattern ahead of US elections

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Major currencies traded in very tight ranges last week, with every G10 currency ending the week within 1% of where it had begun.

ost major markets beyond FX also experienced little change. The main exception where government bond markets, as yields trended higher last week amid a general steepening of rate curves. In particular, the US 30-year yield is now approaching its post-pandemic high of 1.67%. This is so far being interpreted as a sign that markets are increasingly pricing in a Democratic victory in the US elections next week.

In the last week of trading before the US elections markets will be focused on the ECB meeting Thursday. Given the pandemic resurgence in most Eurozone countries and the failure of core inflation to rebound from record lows, we expect the ECB to prepare markets for additional easing at the December meeting, which could weigh on the euro. Aside from that, we expect markets to focus on the US third quarter growth numbers and the flash inflation report on October inflation in the Eurozone.

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GBP

Brexit trade talks appear to be still moving forward, albeit slowly. The EU and the UK appear to have agreed to a ten-point plan on the structure of the next phase of the talks. It seems that our expectations of a modest deal that averts a hard Brexit will be validated.

While this development would seem to lower the chances of additional Bank of England easing, softening economic data and worsening COVID numbers mean that this Wednesday’s MPC decision will be a finally balanced one. For now, Sterling’s recent appreciation has reached our targets against the dollar and we would be cautious at these levels.

EUR

Last week’s PMIs of business activity provided some expected but still discouraging news on the impact of the second wave of the pandemic. The services sector is again shrinking at a fast pace, while the manufacturing expansion gathers pace on the back of the fast recovery in China and other Asian economies. Overall, however, the news moves us closer to additional easing from the ECB. We expect this to come at the December meeting, but this week’s press conference will be used to prepare markets for it.

Additionally, Friday we will pay close attention to the flash estimate of inflation in the eurozone for October. We expect markets to start reacting more strongly to this number. A core inflation print that remains at the all-time lows reached two months ago will further fuel speculation about a more aggressive ECB stance. Friday’s Euro Area GDP data could also receive some attention.

USD

The only news of note this week, aside from election polls, will be the advance estimate of US economic growth in the third quarter. The headline number will undoubtedly show a massive rebound from the record contraction experienced in the second quarter, led by healthy consumer spending. More meaningful will be the breakdown of the rebound into sectors, and in particular the evolution of business investment and the trade deficit.

Markets seem to be ignoring for now the rising contagion numbers in the US, so aside from the GDP numbers, and with polls steady going into the elections, the US dollar will probably trade off events elsewhere, notably the ECB meeting.

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