FX Update: Narrative around the ECB more important than the particulars FX Update: Narrative around the ECB more important than the particulars FX Update: Narrative around the ECB more important than the particulars

FX Update: Narrative around the ECB more important than the particulars

Forex 6 minutes to read
John Hardy

Head of FX Strategy

Summary:  While the ECB may be set to deliver new easing, we are concerned that the market has over-anticipated what this could mean for continuing to drive strong risk sentiment and asset prices. At the root of the issue is how long the market can maintain confidence in the effectiveness and quality of the central bank put from here. In that light, we’ll need to be cautious around the initial market reaction.

Trading interest

  • Staying long AUDNZD with stops below 1.0570 and targeting 1.0950

Risk appetite was boosted yesterday by both Chinese and American overtures on the trade front, as the former announced exemptions on tariffs for a number of product categories and the latter delayed the October 1 tariff raise to October 15 in respect of China’s National Day celebration. USDCNY traded down well below 7.10 into this morning and Asian markets and currencies in general celebrated this “breakthrough”, with the hope now that an October visit to Washington from Chinese . Trump’s firing of security adviser Bolton may be adding to risk sentiment at the margin as well on the hopes that he would prefer to default to avoiding geopolitical confrontation now for the duration to offer maximum support to the economy through next year’s US presidential election.

Today is ECB meeting day, with many items on the policy menu. First we are most likely to see an implementation of tiering of interest rates assessed on bank reserves akin to the Bank of Japan’s system in an effort to reduce the pain on EU banks affected by negative interest rates on their reserves (particularly an issue for German and French banks). Second, we will get a rate cut. Rate cuts are so futile I don’t understand why the ECB bothers, but that won’t stop them from delivering one. Given that Draghi is running out of time and will want to impress, a 20-bps cut might be a bit more likely than the market odds are pricing it at (about 40/60 for 20 vs. 10 bps).

The area where the ECB can surprise most is on the QE front, as renewed QE is clearly controversial on the ECB governing council and where estimates vary from EUR 20B to EUR 60B per month (consensus somewhere in the middle). Beyond these measures, however, it will be important to draw a signal during the press conference on whether Draghi gives the impression that the ECB is shooting its last bullets here or maintains the ability to continue to act. We think not – from here the power is in the hands of the EU and its political leadership as the central bank put has almost entirely lost its potency. In particular at today’s meeting, guidance that feels like Draghi improvising rather than expressing the view of the Governing Council will need to be taken with an extra grain of salt as this is his penultimate meeting.

Yes, it is ECB day, but the key axis in the ECB reaction will likely be along the lines of risk appetite and whether the market can maintain the position that the central bank put remains effective and operational in the wake of whatever Draghi and company deliver today. So all of the risk/safe haven pairs, whether AUDUSD or NZDJPY or EURJPY could move in strong correlation once the market makes up its mind about the effect of new ECB easing beyond the headlines. On that note, a pair like AUDUSD is up against the wall, arguably needs to fade ahead of the 0.6927 retracement to maintain bear trend status that has been in place since early 2018.

Source: Saxo Bank

The G-10 rundown

USD – the greenback with its back up against the wall as risk appetite has staged a remarkable recovery and on the friendlier US-China overtures. Given where markets are trading, the Fed seems unlikely to deliver a particularly dovish message next week, and has to feel a bit rebellious after Trump labelled Fed leadership “boneheads” in a tweet.

EUR – If the market has overpriced ECB easing potential, would look for the Euro to back up sharply versus EM and risky currencies and trade sideways/lower versus the USD and the opposite on the ECB delivering big. Feels like the market is overconfident in what the ECB can deliver, but we’ll soon know.

JPY – yen getting further offers overnight on the strong risk sentiment and boost to bond yields on Trump’s overture to China. Key US yield benchmarks at important resistance (10-year at 1.75%) – next major level for USDJPY 109.00

GBP – UK Supreme court to now have a look at whether Johnson’s move to suspend parliament was unlawful after the Scottish high court said it was. We’re none the wiser on where this leads.

CHF – franc traders struggling to weigh ECB easing (euro negative) versus the rise in bond yields and strong risk appetite (CHF negative). An ECB under-delivery relative to expectations may see the latter a more important driver and EURCHF lower if the market throws a tantrum.

AUD – AUDUSD bears have their back against the wall here as a further charge higher through 0.6925-50 begins to  break the back of the bear market from early 2018.

CAD – CAD not participating in the risk-on as it has been resilient anyway all year and yesterday’s crude oil sell-off sounds a sour note.

NZD – kiwi enjoying the complacency and the Trump overture to delay the October tariffs – a bit more room to run to the upside without breaking things in NZDUSD and NZDJPY terms, but not much.

SEK – krona spiking back to the upside as externalities very supportive (especially risk sentiment) – the reversal looks impressive and if the ECB manages to exceed the dovish bar and boost risk sentiment across Europe, we could be looking at a technically decisive move through 10.60, opening the last bit of the range to 10.50

NOK – EURNOK working down to its key pivot zone, together with everything else risk-correlated, but with a bit of a drag from oil prices correcting on the fear that Trump’s firing of Bolton could mean a friendlier tone from the  US on Iran.

Upcoming Economic Calendar Highlights (all times GMT)

  • 0900 – Euro Zone Jul. Industrial Producttion
  • 1100 – Turkey Repo Rate announcement
  • 1145 – ECB Meeting
  • 1230 – ECB President Draghi Press Conference
  • 1230 – US Aug. CPI
  • 1230 – US Initial Weekly Jobless Claims
  • 1230 – Canada Jul. New Housing Price Index
  • 1700 – US 30-year Treasury Auction


The Saxo 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 is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, 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 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 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 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 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 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.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.