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Risk assets have been helped over the weekend by news that a group of moderate Democrat senators is softening their stance on the US government shutdown. There is still a long way to go here, but we should know over the next couple of days whether the current compromise bill has legs. Expect subdued FX trading, however, given the lack of US data.
 

USD: Thanksgiving focuses the minds

Developments over the weekend hint at a path to ending the US government shutdown. It seems the prospect of massive flight delays around Thanksgiving and the delay in food aid payments has prompted a group of moderate Democrats to back a proposed compromise bill in the Senate. The compromise is far from meeting the full Democratic demands of a delay in the end of Obamacare healthcare subsidies, and Democrats in the House may still reject the compromise. But the next 48 hours in Congress should tell us whether this initiative has legs. US equity futures are marked close to 1% higher on the news, and Asian equity futures have had a good Monday – helped in part by a proposed dividend tax cut in Korea.

FX markets have responded by taking the risk-sensitive Australian dollar close to 0.5% higher. Remember, we said last week that a cross-rate like AUD/JPY had the highest correlation with the US Nasdaq index, which is marked some 1.2% higher today. USD/JPY is pushing over 154 again, and the prospect of a December Bank of Japan rate hike is being swamped by the use of the yen as a funding currency.

While some might argue that the end of the shutdown could be a risk-on, dollar-negative impulse for the FX markets, its impact may be more mixed. Late last week, the dollar was under pressure on job layoffs and rhetoric that the US economy could contract in the fourth quarter should the shutdown extend. At the same time, Friday's release of poor US consumer sentiment data was read as a dollar negative. Progress to end the shutdown may be felt more by risk-sensitive FX cross rates than the dollar.

Away from politics, it is an exceptionally quiet week for US data, and tomorrow the US observes the Veterans' Day public holiday. Where there is data, the focus will be on tomorrow's release of the NFIB small business optimism index. Plus, there are quite a few Federal Reserve speakers. The probability of a December 25bp Fed cut has dropped to 64%. And without US data, that probability may drop close to 50% as Fed speakers generally point to the need to go slow in cutting rates.

If last week's 100.36 high in DXY is to prove significant, it should not really be making it back above the 99.90/100.00 area now.
 

EUR: Rally needs a helping hand

EUR/USD is becalmed after finding support below 1.15 last week. Most probably think that 1.15 proves the bottom of the range, but the rally needs a helping hand. One source of that could be an end to the government shutdown and the release of delayed US data, such as the September or October US non-farm payrolls report. But frankly, that feels like clutching at straws as we start the week.

In terms of eurozone data this week, we've got some investor sentiment data both in the form of the Sentix data at 10:30am CET today and the German ZEW tomorrow. And later this week, we should also see third-quarter eurozone GDP data confirmed at 0.2% quarter-on-quarter.

Again, if last week's 1.1470 low is to prove significant, EUR/USD should somehow find support at 1.1515/1530 through the early part of this week.
 

GBP: Tomorrow's jobs data should weigh

EUR/GBP is back below 0.88 again as GBP/USD seems to find good demand under 1.31. We still think the prospects of a December 25bp cut from the Bank of England are underpriced. The market now attaches just a 60% probability to such an outcome.

Feeding into the BoE story will be tomorrow's release of the September wage data. This is expected to slow further and give the BoE greater confidence that inflation is less persistent than first thought.

Expect EUR/GBP to meet good demand at 0.8750/60 should it make it that low. We prefer levels above 0.88 now.
 

CEE: From central bank meetings to inflation prints

After a busy week of central bank meetings, attention will shift to inflation figures in the CEE region. Tomorrow, October's data will be released in Hungary, where we expect only a small change from 4.3% to 4.4% year-on-year. Underlying price pressures still do not favour a change in monetary policy, as we see core inflation moving above 4% again. In the Czech Republic, final inflation figures will also be released, providing a detailed breakdown.

On Wednesday, Romania will also release October inflation, which we expect to slow down slightly from 9.9% to 9.7%, after a September peak. The National Bank of Romania will also make a decision on the same day, but that should be a non-event with rates unchanged at 6.50%.

On Thursday and Friday, Poland and Romania will release third-quarter GDP figures, where we expect some recovery in both cases. On Friday, the Czech National Bank will release the minutes of its last meeting, and Turkey will release inflation expectations.

CEE currencies have had a decent week, with the Hungarian forint remaining the leader of the pack with new highs on Friday. EUR/USD reversal provides something of a boost for the region, while the market is in no hurry to price in more rate cuts following last week's central bank meetings in the Czech Republic and Poland last week. EUR/HUF approached 384 on Friday, and the forint rally seems too fast for us.

On the other hand, on Friday, we saw talks between US President Donald Trump and Hungarian Prime Minister Viktor Orbán providing an exemption from US sanctions on Russian energy, which should be good news for the markets. We therefore remain slightly bullish on HUF, but it would not be surprising to see some correction of Friday's rally today. Overall, though, the conditions for the CEE region remain slightly bullish in our opinion, and we could see some gains this week as well.

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