Strong USD Hits Euro

EUR/USD
The strong USD weighed on the pair in Asian-Pacific hours with the move a prevalent theme through the European opening hours. EUR/USD tumbled to lows at the 1.2640 level, with the decline intensified on a particularly weak ZEW survey in Germany (ZEW Expectations -3.6 vs. Exp. 0.0), which pushed the pair down close to 30pips after the release. This was also followed later in the session with news that the German government cut its growth expectations for 2014 and 2015, in-line with sources from last week. Meanwhile, the resurgence in the USD-index, on the underperforming GBP, added further weight to the pair as US came back to markets following the thin volumes of yesterday’s Columbus Day. Looking ahead, German CPI and a host of US data points including US Empire Manufacturing and Retail Sales draw focus for the pair on Wednesday.

GBP/USD

Price action for the pair was dictated by UK CPI (Y/Y 1.2% vs. Exp. 1.4%) collapsing to 5-year lows, which saw the pair fall 83 pips on the release, breaking and consolidating below the key 1.6000 handle, and subsequently reaching a session low at 1.5905 as the US came to market. The ONS stated that the largest downward contributions to CPI Y/Y rate was from transport, recreation and culture, restaurants and hotels. As a consequence of CPI printing its lowest yearly rate since Sept 2009, SONIA is now pricing in the next 25bps rate hike from the MPC in 8 months’ time as opposed to 6 months pre-data. Analysts at RBS have already pushed back BoE rate hike call to August 2015 from February 2015, and expect a benchmark borrowing rate of 1% at the end of next year. Looking ahead focus turns to the ILO Unemployment figures from the UK tomorrow so further turbulence can be expected.

USD/JPY

Overnight, the pair traded in a relatively rangebound manner with a lack of pertinent newsflow to drive much of the price action. However, this range was broken out of during the European session alongside the moves in fixed income markets. Notably, the particularly lacklustre UK CPI data as discussed, saw an approximate 50 tick surge in UK Gilts and thus provided some upside for USTs, with the move to the upside in fixed income markets exacerbated by the disappointing German ZEW survey which, provided substantial weight on US yields. This subsequently saw the pair lose out as a result of unfavourable interest differential flows, with the move to the downside exacerbated by EUR/JPY hitting an 11-month low. However, the pair then pulled off its lows as the US came to market and the USD index climbed steadily throughout the session. Looking ahead, attention for the pair will turn towards the upcoming Chinese inflation and Japanese industrial production data.