Global Themes

The euro held strong near 2 ½ year highs after the European Central Bank left monetary policy unchanged. As mostly expected, the ECB left its main interest rates and its QE bond buying stimulus unchanged. In a statement, the central bank said it would stick with plans to buy €60 billion in bonds a month through at least December. The bank reiterated that its trio of rates would remain at or below zero for an ‘extended period.’ The new wrinkle, seemingly designed to check the euro’s rise, was that the ECB stood ready to beef up stimulus if the outlook dims. Market attention now turns to ECB President Mario Draghi’s post-meeting press conference at 8:30 a.m. ET which could ignite unexpected and significant FX volatility. The U.S. dollar maintained a heavy bias while Canada’s dollar continued to bask in the afterglow of a local rate hike the previous day.

GBP

Sterling notched one-month highs against its heavy U.S. counterpart. The pound for now has managed to brush aside headwinds stemming from a moderating U.K. economy and Brexit risk. Much of the pound’s better performance reflects deepening pessimism toward the U.S. currency after a top Fed official suggested stubbornly low U.S. inflation argued against another rate hike this year. U.K. fundamentals will be on full display over the coming week, which could leave the pound vulnerable, with data due Friday on trade and factory growth while next week brings big ticket data on inflation, jobs and the consumer, and a Bank of England decision.

USD

The dollar’s downswing gathered pace after the ECB failed to contain the strengthening euro and U.S. jobless claims nearly hit 300,000, hitting the highest in more than 2 years. Thanks to Hurricane Harvey, jobless claims spiked to 298,000 – far above forecasts of 241,000. The data literally caused clouds to gather over America’s economic horizon, weakening an already tepid case for the Fed to raise interest rates anytime soon.

EUR

Euro bulls were unfazed after the ECB’s statement took a swipe at its massive gains of more than 13% this year. Until recently, many thought the ECB might use its September meeting to spell out an exit plan from its lavish stimulus measures that have boosted growth but weighed on the euro by anchoring yields, diminishing its appeal. The new wrinkle this time was that the ECB stood ready to increase – rather than decrease – stimulus if economic conditions should take a turn for the worse. Still, with the euro zone economy on a bullish path, Mr. Draghi’s caution fell on deaf ears. Given the solid shape of euro zone fundamentals, sooner or later, the ECB seems poised to roll back stimulus, a scenario that would give traction to euro rallies.

CAD

The Canadian dollar kept in close range of fresh two-year peaks after a resoundingly hawkish decision by the Bank of Canada this week. The BOC surprised at least half the market by hiking rates to 1.00% from 0.75%, its second increase in as many meetings, and left the door ajar to further rate rises in the months ahead, depending on the strength of coming data. The bank also seemed unfazed about loonie’s nearly 10% rise this year. Consequently, the outlook for the Canadian currency has brightened in a meaningful way, offering scope for significant appreciation in the weeks and months ahead. Friday’s Canadian jobs report, if strong, could see USDCAD fall through a key psychological support level.

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