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Divergent Policy Strategies between Euro, US Central Banks

Contrasting monetary policy divergence was back on the forefront last week as Fed members showed a strong consensus for hiking rates in December, while ECB Chief Mario Draghi signaled that the Bank was considering expanding its QE.

Weekly Review

Contrasting monetary policy divergence was back on the forefront last week as Fed members showed a strong consensus for hiking rates in December, while ECB Chief Mario Draghi signaled that the Bank was considering expanding its QE. EURUSD touched a 27-week low at 1.0674 last week as the markets turned bearish on the Euro, pricing in the possibility of further QE expansion in December, while at the same time expecting a 25 point rate hike from the Federal Reserve. Economic data from the Eurozone included subdued GDP growth with combined flash GDP estimates rising 0.30% and falling below estimates of 0.40%. Eurozone industrial production fell -0.30% for the second consecutive month, down from -0.40% previously. Last week also saw unemployment data being released for Australia and the UK. The Australian jobs report was strong as the economy added 58.6k new jobs, pulling the unemployment rate lower to 5.90% from 6.20% in the previous report. The strong jobs data sent the Aussie dollar up across the board. From the UK, the ILO labour market data saw the unemployment rate fall to 5.30% from 5.40% and the average hourly earnings gained 3.00%, unchanged from a month ago. The strong jobs data from the UK helped the Pound to recover some of the losses from last week.

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The Week Ahead

To start the week, Japan's quarterly GDP estimates are due for release with forecast estimates of -0.10% contraction. The BoJ's monetary policy statement is due on November 19th. With Harada last week ruling out an expansion to the QQE, it is unlikely to see the BoJ take any major decisions, at least until the December's FOMC meeting is done with. Data from the Eurozone includes the annualized CPI numbers with the Eurozone headline inflation expected to be flat at 0.00% while the core CPI is expected to rise 1.00%, unchanged from the previous print. ECB Chief Mario Draghi will be speaking at an event in Frankfurt which could be a main event risk for the Euro. It will be a busy week for the US Dollar with the monthly inflation numbers due on November 17th. Estimates are for the headline consumer inflation to rise 0.20% for the month while the core CPI is expected to remain steady at 0.20%. A day later the FOMC meeting minutes from October will be released and it is likely to see a strong market reaction in light of the hawkish statement released previously.

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