In the FX, the US dollar continues dictating the overall direction.
The EURUSD and the GBPUSD gave back their early-week gains on the back of a global rebound in the US dollar. Provided the overstretched advance in both pairs, a deeper downside correction would only be healthy at the current levels.
Due today, the European Central Bank (ECB) meeting minutes should reiterate the bank’s dovish mindset but will unlikely hint at a further action in the immediate future. The 5y5y inflation swap rates show a significant uptick in inflation Euro area inflation expectations and more action is certainly not necessary right now. The 1.35-trillion-euro worth of pandemic asset purchases program (PEPP) will continue giving the necessary support to the market until the end of 2020, and we expect the purchases to run through the first half of 2021. The dovish minutes, already widely priced in, won’t necessarily have an easing effect on the euro. The single currency should continue following the lead of the US dollar, and may react to the latest PMI figures due Friday.
Cable, on the other hand, should re-test the 1.30 support on the back of an improved US dollar appetite. Breaking below this level should not be an issue for the pair, given that the pandemic and Brexit worries mostly justify a sterling depreciation against the US dollar.
Elsewhere, the Central Bank of Turkey (CBT) is expected to maintain the one-week repo rate unchanged at 8.25% at today’s monetary policy meeting. But the actual interest rate levels are no longer suitable given the rising pressure on the Turkish lira and the mounting inflation expectations. The CBT has been conducting alternative measures to ramp up the rates, but the latter won’t be sufficient as investors ask a clear hawkish adjustment in policy rates in the near future. Best possible outcome would be a surprise 50-75 basis point hike as an indication of compromise, or a clear message regarding a post-pandemic upside correction in the rates to sooth investors. Otherwise, the USDTRY should continue seeing support at and below the 7.20 mark for a further advance above the 7.50 handle.
