Head of FX Strategy
Summary: The ECB press conference produced a sharp euro comeback as it emerged that President Draghi’s new QE programme was hotly contested and on the general signal that the ECB has already done what it can do and won’t bring further easing from here, at least not as an independent central bank. The euro may have bottomed for now, especially versus the USD and CHF.
Trading Interest
The ECB meeting was a brilliant test of market themes and assumptions yesterday. The immediate market reaction on the release of the new measures was whether the ECB had over- or undelivered on what was promised. The open-endedness of the QE was cited as a chief driver of a considerable knee-jerk EUR sell-off that saw EURUSD and other euro crosses testing or testing beyond recent lows. But during the Q&A, the euro reversed course violently and rallied to close at an eleven day high in the case of EURUSD.
The euro snap-back was chiefly a product of the Draghi press conference and some details that immediate emerged as Draghi spoke, especially that ECB representatives of key core countries Germany, France and the Netherlands, as well as Austria and Estonia, leaned heavily against the new QE, probably the most potent new ECB measure. Draghi clearly found it difficult to answer a journalist’s question asking about the strength of the ECB governing council’s decision to do QE and this suggests that QE, while purportedly open-ended, is not likely to be expanded under a president Lagarde. Effectively, then, while another rate cut or two is possible from here, that is weak policy beer and this easing programme is all that the ECB can deliver for now. Underlining this message further, Draghi himself said in the press conference that “It is time for fiscal policy to take charge.” The ECB is done and the lows may be in for the likes of EURUSD and EURCHF if the EU shifts into fiscal stimulus mode under its new leadership.
Some of the weakness in the G10 smalls yesterday likely down to the Euro strength as short EUR/risk has likely been a popular trade, given the price action in many of these crosses in the two weeks and more prior to yesterday’s ECB meeting.
The August Core CPI in the US rose to a cycle high 2.4% - the highest print since 2008 and making the Fed’s job that much the dicier next week in deciding what signal to send on policy. Health care prices were the chief driver behind the rise, posting their largest single-month gain since 2016. The US 30-year T-bond auction was labelled “weak” but was unremarkable relative to the prior auction. The backup in US yields has proven chunky and has pulled to and slightly beyond the next quarter point resistance levels, the 1.75% level in the US 10-year benchmark and the 2.25% level for 30-years.
US President Trump is showing deepening signs of not standing for much else save for chaos as his latest tack is to suggest that an interim deal with China is possible. An FT article (paywall) quotes Trump on this: I see a lot of analysts are saying an interim deal, meaning we’ll do pieces of it, the easy ones first,” Mr Trump said on Thursday when asked by reporters. “But there’s no easy or hard. There’s a deal or not a deal . . . It’s something we would consider, I guess.” Other administration officials’ comments sounded less promising.
Chart: EURUSD
The strong dip and comeback on the very day of a key event risk in the form of yesterday’s ECB meeting is a sharp technical bullish signal and we’ll look for follow through in coming days. The long-sliding price action of the past year and more doesn’t build confidence in a large scale move here, which will likely require a strong signalling that fiscal policy is swinging into action. A close above 1.1100 sets the ball rolling for bulls, but the pair really needs a chunky rally into 1.1400 or higher to suggest a trend shift.
The G10 rundown
USD – the big dollar a bit mixed, higher versus CHF and JPY as long bond yields pulled higher yesterday and US equities tried at the highs for the cycle, but trading indifferently versus risky currencies. Higher US rates are pushing back against the narrative driving strong risk appetite, while US-China trade tension easing is pushing the other way.
EUR – a pivotal day yesterday and now we look for the follow through. To more firmly turn a key chart like EURUSD need to see a rally to something like 1.1400, but let’s start with 1.1200.
JPY – yen not liking the higher long rates and will remain on its back foot in broad terms until these turn. The 109.00 area in USDJPY the next important resistance.
GBP – EURGBP trading in sympathy with other Euro crosses – and 0.8900 looks like an important area. A nervous wait for the next batch of headlines.
CHF – A nice rally bar in EURCHF as the hopes for a switch to fiscal could finally keep the chart supported on a more sustained basis – watching whether 1.1000 can fall.
AUD – hope for a thaw in US-China trade tensions and a solid comeback rally in iron ore supporting the Aussie at the margin – watching the 0.6900-0.7000 area in AUDUSD for whether we see a full trend-neutralizing rally.
CAD – CAD on the defensive as the latest consolidation in bond yields has seen US yields bounce more forcefully than Canadian yields over the last week. USDCAD hasn’t begun to reverse the recent sell-off until up into the 1.3300 area.
NZD – AUDNZD progressing to new local highs, allowing longs to raise their stops. The move perhaps driven at the margin by a very weak Aug. House Sales data point overnight
SEK – EURSEK backing up as a function of across the board EUR strength,but actually a EU fiscal shift could prove more SEK positive (and a SEK fiscal shift could prove extraordinarily so if no evidence yet that the Swedish government’s attitude is shifting.) Even hopes of an eventual EU fiscal shift can get EURSEK back into 10.50-40
NOK – similar idea as for EURSEK, but disappointing to see EURNOK so far above 9.90 – looking for local bearish hook to argue for a move back toward 9.60.
Upcoming Economic Calendar Highlights (all times GMT)
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)
