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FX markets stay quiet ahead of ECB decision, U.S jobs data ahead ECB’s meeting

- EURUSD is trading around 1.0600. We do not expect high volatility on the markets today as tomorrow ECB’s meeting is already in the focus of investors
- US, economic data are not supportive of a rate hike this month although the Fed is now doomed to raise rate even though the economy is faltering 
- In Brazil, the economy contracted more than expected in the third quarter therefore we believe the Brazilian real to remain under pressure due to the grim outlook.
 
Once again data from the US was broadly mixed yesterday as investors impatiently await the Federal Reserve to start tightening at its December meeting. Looking at the implied probabilities of a rate change, it seems that the market is increasingly confident about a December delivery. Probabilities extracted from the OIS showed that odds of a rate hike have reached 76% compared to only 45% a month ago. We have the feeling that the economic data does not matter anymore as market participants focus solely on the wording used by Fed members. In our opinion, the economic data is in fact not supportive of a rate hike this month. However, the Fed had cornered itself and is getting beaten at his own game with Yellen claiming for months that everything is just fine. The Fed is now doomed to raise rates even though the economy is faltering and will sound dovish with or without a rate hike. This morning, EUR/USD is stabilising around 1.06 as traders await tomorrow’s ECB meeting, during which Draghi is expected to announce an extension and/or an increase of its asset purchase programme, but also Friday’s NFPs. 
 
***Yann Quelenn, Market Analyst: “ADP Employment Change will come in today. Expectations are for a November employment change of 190K vs 182k in October. Despite spectacular misses over the last few years, and especially last month when NFP printed almost 90k above ADP, it has been often a good indicator of US non-farm payrolls that will be released this Friday. The discussions for December are still very important as a rate hike seems very likely. We believe that the Federal Reserve has to end the zero-interest policy with its credibility now at stake. Over the past few months, there have been plenty of declarations about the health of the U.S economy, in particular that U.S jobs unemployment was stable and that inflation was set to reach its target of 2%. We continue to think that the U.S economy recovery is overestimated. It is now clear that the overall U.S. economy is based on a massive debt, appraised at $18 trillion. A single dollar of revenues costs at least three times more in debt. We perfectly understand why Fed member Evan's statement that the “FOMC rate decision makes him nervous”. Indeed, the price of the Fed’s credibility may be very high.
 EURUSD is trading around 1.0600. We do not expect high volatility on the markets today as tomorrow ECB’s meeting is already the focus of investors.”***
 
On the equity market, Wall Street closed in positive territory yesterday with the S&P 500, the Nasdaq and the Dow Jones up 1.07%, 0.93% and 0.95% respectively. However, Asian equity markets failed to follow this positive lead and are trading mostly in negative territory. In Japan, the Nikkei was down 0.37%, while the Topix index edged up 0.02%. In mainland China, the two equity gauges moved in opposite direction as the Shanghai Composite surged 2.33%, while the Shenzhen Composite fell 0.41%. In Hong Kong the Hang Seng was up 0.53%.
 
In Brazil, the economy contracted more than expected in the third quarter (GDP contracted 1.7%q/q versus -1.2% consensus and a downwardly revision of -2.1% in the Q2) as the spillover effect from the Petrobras corruption scandal has brushed aside the country's economic woes. Even though household consumption fell less than expected (-1.5% vs -2.5% expected), the political gridlock hurts fixed investments, which contracted 4%q/q. USD/BRL tested 3.90 in early session yesterday before stabilising at around 3.85. We expect the Brazilian real to remain under pressure due to the grim outlook.
 
Today traders will be watching construction PMI from UK; CPI and PPI from the euro zone; MBA mortgage application, ADP employment change, Beige Book, Yellen, William, Lockhart and Tarullo’s speeches; BoC interest rate decision

Wednesday, 02 Dec, 2015 / 9:27

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