FX Daily Strategist: US

Germany’s ifo report was on the weak side of consensus expectations dropping to 107.4, relative to an expected rise to 108 (index, sa). The expectations component fell to 103.6 (from 104.2) and the current assessment index was roughly steady at 111.3 (index, sa). EURUSD continues to carve out new highs, albeit at a slower pace. While some market participants already have 1.40 in their sight, our economists highlight that this level could be the tipping point for the ECB, forcing a reassessment of the inflation outlook and an eventual ECB rate cut (for details see “ECB: A case for cutting” in the latest issue of Macro Matters). In this context, we continue to watch ECB comments closely, with Executive Board member Asmussen due to speak today. He has already been quoted today commenting that though he doesn’t have worries regarding the euro, it is a source of concern when factored into the ECB’s inflation forecast. Elsewhere in Europe, UK Q3 GDP growth was 0.8% q/q, slightly weaker than our economists’ forecast of a 0.9% q/q rate. In contrast to the eurozone, the pace of UK growth is more consistent with the recent tightening in money market conditions, which explains the lack of concern from the BoE. However, there are two factors mitigating further GBPUSD upside: a) the bar for positive data surprises has been set high and incoming releases are more likely to fall short and b) long GBP positioning is already elevated. Our short GBPUSD recommendation remains intact.