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Fed Speak Shows Hawks Outnumber Doves

Remarks Made by Six Federal Reserve Members Showed the Central Bank is Likely to Reach Consensus

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The probability for a December rate hike continues to gain traction as the Fed member speeches alluded to a growing number of hawks while the doves also seemed to be inclined in favor of a rate hike, calling for a cautious approach ahead of raising rates. On the other side of the Atlantic, the ECB continued to strike a dovish tone with Mario Draghi giving ample clues that further policy easing will take place.

FOMC Members Broadly Form Consensus

Fed members took turns to briefly talk about monetary policy yesterday and the markets were indeed volatile. While Janet Yellen refrained from making any references to monetary policy, the remainder of the Fed members took time to paint an optimistic view of the US economy striking a fairly confident tone that there was a strong and a broad consensus among the voting members for hiking rates in December. The only exception was Chicago Fed Governor Charles Evans who struck a cautious tone, noting that there would be substantial costs to premature monetary policy normalization. He however remained optimistic noting that the Fed funds rate could be between 0.75% and 1.00% by end of 2016 while expecting to see the US unemployment rate stabilize to 4.90% by end of 2016. The equity markets slipped on the Fed speak as the S&P 500 closed below its 200-day moving average ending yesterday’s session at 2039.

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Draghi Sends the Euro Lower

The EURUSD pair dropped below 1.0700 in intraday trading yesterday, touching a low of 1.0690 after ECB President Mario Draghi talked the Euro down. The single currency's strong prformance since May of this year was cited as one of the reasons for a weaker outlook on inflation. Draghi reaffirmed the ECB's decision to reevaluate the asset purchase program in December noting that the degree of monetary policy accomodation would be considered. Furthermore, he confirmed the rumors that the ECB would consider cutting deposit rates further and potentially monetize municipal bonds as reported by Reuters earlier in the week. Besides Draghi’s comments, economic data from Eurozone yesterday included the German inflation which stayed flat at 0.0% while French CPI ticked higher 0.10%, up from -0.40% last month.  EURUSD managed to stabilize post Draghi's comments, lifting off from the lows to close the day on a positive note at 1.0810.

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Euro Area GDP Estimates Due Today

After lackluster inflation data yesterday, Euro Area GDP estimates will be released today. The preliminary GDP estimate for the Eurozone is expected to stay unchanged at 0.40% from last quarter. Weaker GDP numbers are likely to keep the pressure on the Euro as the single currency struggles near the lows. Earlier this week, Euro Area industrial production fell -0.30% in September, posting a second month of declines from -0.40% in August. The weak set of data is likely to keep the GDP numbers subdued. EURGBP formed a short term base near 0.7060 and 0.7050 yesterday, closing the day with modest gains in a near-term bullish engulfing candle. The currency pair has previously posted a strong and steady decline but managed to recover after the BoE’s dovish inflation outlook with more volatility expected as Britain starts to campaign for the EU membership referendum.

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US Dollar at Risk from Retail Data

The main economic event from the US today will be the retail sales numbers. Expectations are bullish with the core retail sales estimated to rise 0.30%, up from 0.10% declines last month while the headline retail sales is expected to rise 0.30%, up from 0.10% last month. The US producer price index data is also due with a headline estimates of 0.20% and core PPI estimates of 0.10%. The expectations are bullish for the producer price index after producer inflation fell -0.50% on the headline and -0.30% on the core last month. Another subdued reading of the PPI is likely to keep pressure on consumer inflation. Winding up the US session, the University of Michigan's Consumer Sentiment and Inflation Expectations are also due for release. USDJPY has been posting lower lows and highs for the past three sessions, closing yesterday on a strongly bearish note at 122.60.

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