EURUSD exchanged hands in the 1.0920s on Monday, marginally down on the day, as the US Dollar attracts safe-haven flows on the back of increasing geopolitical risks stemming from Taiwan, where the Chinese People’s Liberation Army (PLA) is conducting drills.
This prompted a spokesperson from the State Department on Monday to say that they were “seriously concerned” with the PLA’s activities in the Strait of Taiwan.
EURUSD could also come under increasing pressure as traders sell the Euro ahead of the European Central Bank meeting on Thursday.
Most analysts now expect the bank to announce a further 25 basis point (0.25%) rate cut at the policy meeting, making it the second cut in a row. This, in turn, is likely to weaken the Euro since falling interest rates attract lower foreign capital inflows.
In September, Eurozone headline inflation declined to 1.8%, falling below the ECB’s 2.0% target for the first time in over three years. This, combined with a slowdown in economic activity, is increasing bets of another rate cut on Thursday. Such a move would signal a significant “gear change up” in terms of the pace and timing of the ECB’s easing cycle.
Trading floors in the US, meanwhile, will likely be mostly empty due to employees being away for the Columbus Day public holiday on Monday. Although some equity trading will still go on, the US bond market will be closed.
Investors expect a 25 bps rate cut from the Federal Reserve in November after the Producer Price Index inflation data on Friday showed headline PPI slowed to 0.0% on a monthly basis in September – missing expectations of 0.1% and the prior month’s 0.2% reading.
Core PPI inflation, which excludes volatile food and energy prices, slowed to 0.2% from 0.3% in August.
Annual readings, however, resulted mixed, as PPI decelerated while core PPI rose by 2.8%, above the prior month’s 2.6%. Although mixed annual performance, the monthly readings weighed, as did the preliminary US Michigan Consumer Sentiment Index for October, which fell below September’s reading and analysts’ estimates.
The CME FedWatch Tool is showing the markets are now pricing-in a 90% chance of a 25 bps Fed rate cut – up from 83% before the PPI data.
EURUSD chart by TradingView
(Source: OANDA)
