EUR/USD: Draghi Says Low Rates Have Rising Costs

EUR/USD: Draghi Says Low Rates Have Rising Costs

• ECB President Mario Draghi said the ECB is aware of the growing costs to the financial sector of its ultra-loose monetary policy and would rather not have to keep negative interest rates for too long.
• Draghi defended the ECB's policy of aggressive bond buying and ultra-low rates from accusations that it has led to growing inequality and a shift of financial income from stronger to weaker economies. But he also acknowledged complaints by banks, particularly in Germany, that low rates are eating into their profits.
• Draghi's comments were likely to further lengthen the odds on another cut in the ECB's deposit rate of -0.40%.
• Speaking almost simultaneously at a separate event, German Finance Minister Wolfgang Schaeuble said there was a growing international consensus that monetary policy had reached its limits.
• The focus will be on U.S. third-quarter growth data to be released on Friday. The rebound in US growth from 1.4% in the second quarter 2016 to 2.6% in annualized terms will likely confirm market expectations for a Fed rate hike in December. The market was pricing in a greater than 78% chance that the Fed would raise rates in December.
• The EUR/USD recovered after yesterday’s comments from Draghi. We opened EUR/USD long at 1.0905 today in the morning of the European session. We expect a recovery to 1.1035, near October 20 high.

GBP/USD: BoE Cannot Ignore GBP Drop Next Week

• The GBP/USD recovered to around 1.2200 today, having fallen below 1.2100 the previous day, as expectations for an interest rate cut next week faded.
• Bank of England Governor Mark Carney prompted the strengthening by saying in a speech the BoE could not ignore the pound's "fairly substantial" drop since the vote to leave the European Union. Carney said there were limits to the central bank's ability to overlook the effect of the steep slide - about 18% since the Brexit - on inflation, and it would "undoubtedly" take it into account at its rate-setting meeting next week.
• In early September the BoE said it was likely to cut rates again this year if the economy slowed as it expected. But sterling's weakness and unexpectedly robust economic data have prompted investors to rule out a November 3 cut.
• 14-day GBP/USD momentum remains negative, reinforcing the overall bearish structure. However, it would be risky to get short at this level, especially ahead of BoE meeting next week. We stay sideways as in our opinion it is not justified to take any position from the risk/reward perspective.

AUD/NZD: Aussie Strengthened By Inflation Data

• The Australian dollar was an outperformer on Wednesday, bucking a broad risk averse environment in global markets, helped by a better-than-expected inflation reading that dented chances of an interest rate cut in the near term.
• Consumer prices rebounded by more than forecast last quarter in Australia, while the annual pace of core inflation edged up for the first time in over a year, leading investors to price out almost any chance of a cut in rates next week.
• Core inflation favoured by the Reserve Bank of Australia showed an average rise of 0.4% in the third quarter, matching expectations. The annual pace inched up to 1.6%, from a record low of 1.5%, a tentative sign inflation may have finally bottomed after a run of surprisingly subdued readings. The headline CPI tends to be more volatile and subject to one-off price shifts. It rose 0.7% in the third quarter taking the annual pace to 1.3%, from 1.0%.
• Investors reacted by selling interbank futures so that they implied just a 4% chance of a rate cut at the RBA's next policy meeting on November 1. The RBA has sounded reluctant to ease again, in part because ever-lower rates could prove counterproductive. Just last week, RBA Governor Philip Lowe cautioned that trying to get inflation higher in a hurry might stoke a borrowing binge in the housing market, which is already running hot in Sydney and Melbourne.
• Also helping the Aussie was a surge in the price of iron ore, Australia's single largest export. Dalian iron ore futures climbed to a fresh 26-month peak on Wednesday, underlining demand from China, Australia's leading trading partner. Coal, another key Australian export, is also on an upswing. Analysts estimate the rebound in prices, if sustained, could wipe out the country's overall trade deficit and lift annual growth in nominal gross domestic product from the current 3% to a robust 5%.
• The AUD/NZD continues to rise. The AUD/NZD jumped to 1.0754 after Australian inflation numbers. New Zealand's central bank meets on November 10 and is considered almost certain to ease a quarter point to a record low of 1.75%, though that might well be the last cut in the current cycle.
• We have raised the stop-loss on our AUD/NZD long to the entry level (1.0610).

Source: GrowthAces.com - Daily Forex Trading Strategies