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The Federal Reserve (Fed) minutes from the September 20th/21st meeting suggested that a September interest rate hike was a closer-than-expected call. The FOMC’s voting members agreed that the macroeconomic fundamentals became favourable for an interest rate hike in the US, while several believed that a rate hike was ‘needed relatively soon’.
Following the Fed’s September meeting minutes, the market assesses a 68% chance for a December rate hike, provided that the macroeconomic data and the political situation in the US are supportive of an orthodox move.
The FOMC is expected to remain on hold at its next monetary policy meeting, due on November 1st-2nd, a week before the November 8th presidential election. Heading into the US election, we could see a certain lack of appetite due to pre-election political risks and expect an increase in the US dollar volatility, which would include potentially sharp positive and negative moves, and compromise the Fed related strength both in the US dollar and the US sovereign market. Downside corrections could offer interesting buy-the-dip opportunities for building on mid/long-term USD-long positions.
The US 10-year yields topped at 1.80% yesterday, before easing to 1.73% in Asian trading session.
EURUSD slips below 1.10
The euro slipped below the 1.10 level against the US dollar for the first time since July. Talks that the European Central Bank (ECB) could review its Quantitative Easing programme bolstered euro outflows towards the US dollar. The ECB is looking for alternatives to be able to expand its asset purchases programme beyond March 2017, and this would require changing the capital ratio, buying bonds yielding below the deposit rate, and/or buying front-end bonds.
The divergence between the Fed and the European Central Bank (ECB) policy outlook is clearly weighing on the pair, as the US-EU rate differential reached a new low. The key short-term supports are eyed at 1.0951 (Jul 24th low) and 1.0910 (Jun 23rd low).