FX Daily Strategist: US

Preliminary Eurozone CPI significantly undershot forecasts in October (0.7% y/y vs. 1.1% y/y) with the pace of inflation falling to the slowest pace since November 2009. We think that this should increase market speculation that the ECB changes its bias on inflation risks from being “balanced” to the “downside” at their meeting on November 7. Our economists now forecast a rate cut in December (See today’s note: ECB: Rate cut(s) coming). Given that the market has under-priced this, we think that there is substantial scope for EUR to weaken in the next few weeks. Our BNP Paribas FX Positioning indicator has flagged that long EUR positioning has been overstretched to the topside for several weeks (at +24 currently the largest long G10 position). Earlier today, we added a short EURNZD position (more below). We also think that EURUSD should fall from here following yesterday FOMC with USD prone to a short-covering rally near term.