EUR/USD Hits 1.0550; GBP/USD Closes Below 1.5000

 | Dec 03, 2015 06:41AM ET

• ECB to unleash fresh stimulus All eyes will be on the ECB policy meeting in what is probably the most highly anticipated Bank meeting after the US Fed gathering in mid-December. The market is already pricing in a 10bps deposit rate cut, with some participants -including us- calling for an even more aggressive 20bps reduction. An increase in the size of the Bank’s monthly purchases, as well as an extension in the duration of the program is thought to be a closed deal. As such, the Bank will have to deliver measures over and above current market expectations to avoid an upward movement in the euro, in our view. In the last few weeks, ECB President Mario Draghi and several Bank officials essentially pre-committed for another rate cut and an increase of the current stimulus package. Anything less than current expectations could disappoint investors and we could see the common currency strengthening. We should bear in mind however the well-known rhetoric of ECB’s Draghi to do whatever it takes to support Eurozone’s economy and by that, he could always surprise the markets and bring EUR/USD closer to parity.

• Fed Chair Yellen is confident in the outlook for the economy Fed Chair Janet Yellen said that she is confident in the outlook for economic growth and warned that waiting too long to start the policy normalization process could lead the Fed to tighten too quickly. Such an abrupt tightening she said, would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. This was the latest sign that the Fed is poised to raise rates at their meeting in few weeks. Chair Yellen testifies today before the Congress’ Joint Economic Committee, and she is probably going to discuss again her view on the current economic situation along with monetary policy ahead of the crucial FOMC meeting. We expect that while she may leave expectations of the rate increase in place as she did on Wednesday, the focus will shift on the pace of the hikes that will follow.

• Today’s highlights: As for indicators, we get the final service-sector PMIs for November from the countries we got the manufacturing data on Tuesday. The final forecasts for France, Germany and Eurozone are the same as the initial estimates, so no major market reaction is expected. The UK service-sector PMI for November is forecast to have risen somewhat. Having in mind the negative surprises in the manufacturing index on Tuesday and the construction PMI on Wednesday, further deterioration in the service sector could not be ruled out. This could weaken the pound further. Eurozone’s retail sales for October are expected to have risen, after falling the previous month. However, with the market aligned behind further easing by the ECB, these data are likely to pass unnoticed.

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• In the US, the US final Markit service-sector and the ISM non-manufacturing PMIs are coming out. The market pays more attention to the ISM index, which is expected to have declined. This could add to the unexpected decline in the ISM manufacturing index on Tuesday and raise some concerns over the US economic recovery. The US factory orders for October are expected to have risen after falling in September. Initial jobless claims for the week ended November 27 are coming out as well.

• Besides ECB President Mario Draghi and Fed Chair Janet Yellen, we have four more speakers on Thursday’s agenda. Fed Vice Chair Stanley Fischer, Cleveland Fed President Loretta Mester, ECB Executive Board member Yves Mersch and Norges Governor Oystein Olsen speak during the day.

h3 The Market/h3

h3 EUR/USD hits 1.0550 ahead of the ECB meeting/h3