EUR crosses generally edged higher yesterday after notably peripheral spreads tightened on the back of the Italian rating upgrade, and as the dust settled a bit after last week’s dovish ECB message and Catalan tensions.
As we wrote in this week’s FX Essentials, 30 October, we do however look for EUR/USD to settle above 1.16 in the coming days and still see the cross as a range play (roughly 1.16-1.19) in the near term – not least if Trump announces Powell as the new Fed Chair, which could happen this Thursday. The US Treasury yesterday revised down its estimate for the US cash balance for end-Q4 to USD205bn and now estimates the cash balance at USD300bn at end-Q1. The estimates are consistent with our present outlook for USD liquidity, which should stay relatively easy for the rest of the year, but tighten next year.
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GBP outperformed in the G10 space yesterday with EUR/GBP dipping below 0.88 temporarily. As such, GBP is likely to remain underpinned going into the BoE meeting on Thursday, but given that a rate hike is highly anticipated already and priced into the UK money market, we see only limited scope for further GBP strength on the rate hike announcement and expect EUR/GBP to stay above 0.87. The direction for EUR/GBP from here will crucially depend on whether the BoE signals that the November hike is a one-off or not. We expect the BoE to remain on hold for the next 12M after the rate hike on Thursday and target EUR/GBP at 0.88 in 1-3M.