Forex Forecast

Spanish Regional Elections Elections in the Spanish regions, Galicia and the Basque country, were completed on Sunday. According to exit polls, Spanish Prime Minister Rajoy’s Popular Party extended its majority in Galicia (Rajoy’s home region), offering some respite to the central government as it pushes through an ‘unpopular’ austerity programme.

Summit Under Way The dollar reversed some of its losses on Friday, though this comes after a heavy week of selling. Investors are clearly concerned about getting ahead of themselves following yesterday’s US data which was at best, mixed.

Closer Union Despite problematic trading in equities during the US session, Asian markets look set to end Friday broadly flat as news reports from the EU summit pointed to a rather mixed outcome.

EU Summit In Focus EURUSD fell by about 50 pips on Thursday after three consecutive days of gains. Day 1 of the EU summit did not offer much in terms of new developments (till the late hours of the New York session).

USDJPY Pushes Higher USDJPY continued to push higher overnight, fuelled by further positive data releases in the US yesterday. Housing starts jumped by 15% to 872k (consensus: 770k), highest level since July 2008, and building permits were up by 11.6% to 894k (consensus: 810k) in September.

Data Firming The EUR has managed to hold on to most of its gains this week despite some dashed expectations of an aid request by the Spanish government yesterday.

Risk Appetite Steady USD and JPY gained across the board during the New York session as risk appetite remained steady. Spanish bond market rallied, with 10y yields dropping by about 35bp after Moody’s affirmation of Spain’s rating yesterday.

USD Selling Continues As expected the BoE MPC voted 9-0 to keep QE at GBP375 bn and interest rate at 0.5% in October. Some members saw “considerable scope” for more QE, which fits in line with the market view of further stimulus in November.

Risk Appetite Buoyant The risk environment was more constructive overnight after Moody’s affirmed the Spanish sovereign rating at Baa3, with a negative outlook.

Moody’s Affirms Spain’s Rating EURUSD was up by almost a big figure on Tuesday. Moody’s affirmed Spanish sovereign rating at Baa3 with a negative outlook. The decision removed an immediate risk that Spain gets downgraded to junk category, leading to some structural selling of Spanish debt by real money accounts.

EUR pushes higher The German ZEW October survey showed somewhat mixed results – the current situation numbers came in at 10.0 from 12.6 (consensus 11.8).