FOREX: FX OPTION EXPIRY - Large in EURUSD

Q: The Bundesbank last week in its forecast sketched out an impact on the German economy of a tariff scenario, which would tip it into a slight contraction. How do you see that for the Eurozone?

• Lane: This is why we made these observations in the monetary policy statement. Most of the time, it will be a downside for GDP, so we are clear on that. For inflation, there are many ancillary assumptions you have to make, so the impact is uncertain. The Bundesbank report makes a set of assumptions there.
• We have a good machine to run many scenarios, but it is not productive to work on that now. Once we have a clearer picture, we can assess the scenario in concrete and incorporate it into our assessment.

Q: In the event of increased tariffs, would the ECB welcome a depreciation in the Euro to increase competitiveness

• Lane: We will assess this on the impact it has on price stability. We take a general equilibrium view of the exchange rate. It is important to think about trade-weighted exchange rates rather than e.g. EURUSD. It matters quite a lot about how firms everywhere make pass-through decisions.

• AUD and the Kiwi are still the worst performers in G10s against the Dollar, and both Currencies are extending further lows, a continuation from the Overnight session into the European hours.
• While the moves aren't too fast and more of a 1 pip at a time drag, AUDUSD now look to test the next immediate hurdle at 0.6300.
• EURAUD also targets the Immediate September high situated at 1.6647, and further upside momentum will open to 1.6682.
• NZD still eye 0.5700 next, so far only managed a 0.5723 low.

• The Fed decision later today marks the halfway point of the last full week for markets of 2024, at which the FOMC are expected to proceed with a further 25bps rate cut. The market is set to focus not on today's decision itself, but on the messaging and communication for the path of policy across 2025, via the policy statement, Powell's press conference and the dot plot.
• Ahead of the decision, the greenback is firmer, but only modestly so - with price action largely contained and recent ranges respected. The USD Index remains at the upper-end of the December range, making 107.19 the bull trigger, above which the USD eyes the best levels seen since the Presidential election at 108.071.
• Elsewhere, the EUR trades well, recovering a small part of recent weakness, aided higher by demand in the crosses: EUR/AUD has broken to a new monthly high and cleared resistance at the early November print of 1.6601. For now, 1.6648 is holding, but clearance of that mark will be the highest EUR/AUD print since August.
• GBP has slipped against most others as both core and services CPI came in modestly below expectations. As a result, markets have shrugged off the inline headline read, which should have little bearing on the thinking of the MPC.
• Outside of the Fed decision, US housing starts and building permits data are set to cross.