ECB Meeting Review
- Euro rates saw volatility emerge on Thursday around the September ECB meeting as outgoing President Mario Draghi both disappointed and surprised on the easing front. But to be clear: “Super Mario” did, in fact, make an appearance.
- Even as the ECB embarks on a new QE program, it still holds that the ECB only cut its main rate by 10-bps; the Federal Reserve will be able to outpace the ECB in a rate cut cycle, given that the ECB is already in negative territory.
- The IG Client Sentiment Index isn’t sold on a significant rebound by the EUR-crosses, however.
Looking for longer-term forecasts on the Euro? Check out the DailyFX Trading Guides.
Euro rates saw volatility emerge on Thursday around the September ECB meeting as outgoing President Mario Draghi both disappointed and surprised on the easing front. But to be clear: “Super Mario” did, in fact, make an appearance. And if traders got the feeling that the European Central Bank is turning Japanese, they may not be wrong.
September ECB Meeting Summary
Here’s a summary of the key decision taken yesterday by the ECB’s Governing Council, the last meeting by outgoing President Mario Draghi at which a new set of Staff Economic Projections (SEP) were produced:
- Interest Rates: 10-bps cut, as expected; open to more rate cuts
- QE: €20 billion/month beginning November 2010; open-ended
- TLTROs: Removal of 10-bps spread over deposit rate
- Deposit Tiering: Japanese model
- Forward Guidance: Rates to “remain at their present or lower levels”; linked to core inflation
On one hand, the lack of a 20-bps rate cut – of which there was nearly a 50% chance of occurring, per overnight index swaps ahead of the September ECB meeting – proved to be a disappointment for some market participants. Similarly, investors were looking for the Swiss model (exemptions as a percentage of minimum reserves) instead of the Japanese model (based on excess reserves).
On the other hand, with forward guidance clear, there is still an overtly dovish tilt to rate pricing (more on that below). The announcement of the QE program was a surprise, as was the change to the TLRO program. It can very much be considered that the “Super Mario” version of ECB President Draghi made an appearance yesterdat.
Eurozone Economic Data Still Disappointing
Now that the ECB is putting its foot back on the monetary pedal, and that forward guidance is explicitly linked to shifts in inflation, investors may see markets become more sensitive to Eurozone economic data in the coming periods.
The ECB’s efforts come when Eurozone economic data is seemingly improving, relatively speaking. The Citi Economic Surprise Index for the Eurozone, a gauge of economic data momentum, is currently at -36.8; one month ago, it was at –52.8.
Eurozone Inflation Expectations versus Brent Oil Prices: Daily Timeframe (September 2018 to September 2019) (Chart 1)
Outgoing ECB President Mario Draghi’s preferred measure of inflation, the 5y5y inflation swap forwards, is currently trading at 1.319%, higher than where they were one week ago at 1.256% and one month earlier at 1.279%, and still significantly above the yearly low set on June 17 at 1.141%. It would appear that the latest efforts by the ECB are provoking a sharp jump in inflation expectations – a sign that the Euro may prove resilient despite the next wave of easing measures.
ECB Rate Cut Cycle Has Only Just Started
Now that the ECB cut interest rates in September – meeting expectations, given that overnight index swaps were discounting a 100% chance of a 10-bps rate cut entering today – investors are quickly shifting their expectations for future policy moves. Given the tone deployed by outgoing ECB President Draghi, particularly around the forward guidance that leaves the door open to more rate cuts, interest rate markets are still pricing in more easing over the coming months.
European Central Bank Interest Rate Expectations (September 12, 2019) (Table 1)
Overnight index swaps are currently pricing in a 62% chance of a 10-bps rate cut at the October ECB meeting. If not, there is a 71% chance of a second 10-bps rate cut coming at the December ECB meeting. But this is the big move: whereas last week rates markets were pricing in three 10-bps rate cuts in September and October 2019 and January 2020; after the September rate cut, rates markets now see the next cuts coming in October 2019 and July 2020.
That the third rate cut has been pushed back by six months may give the Euro some room to breathe in the short-term. But there’s another point to consider as well: the ECB has less room to cut rates than the Fed. If the Fed meets expectations and cuts rates by 25-bps at its meeting next week, then the differential between Fed and ECB will rates will have narrowed by net 15-bps during September 2019.
EURUSD TECHNICAL ANALYSIS: DAILY RATE CHART (MAY 2018 TO September 2019) (CHART 2)
In our last EURUSD technical forecast update, it was noted that “the area where EURUSD rates found support is familiar: channel support dating back to the August and November 2018 lows. Similarly, the descending trendline from the January and April 2019 swing highs is proving as support as well…If the EURUSD reversal is going to gather pace, traders may want to see rates breach the August 23 bullish outside engulfing low at 1.1052.”
While EURUSD has been unable to clear out 1.1052 thus far, the support region from last week that produced the yearly low at 1.0926 has held up so far; the low around the September ECB meeting was 1.0927. As a result, we’re now seeing a range form for EURUSD between 1.0926 and 1.1052. The measured target on a bullish reversal attempt higher would be 1.1178.
IG Client Sentiment Index: EURUSD RATE Forecast (September 12, 2019) (Chart 3)
EURUSD: Retail trader data shows 60.3% of traders are net-long with the ratio of traders long to short at 1.52 to 1. In fact, traders have remained net-long since July 1 when EURUSD traded near 1.1369; price has moved 2.7% lower since then. The number of traders net-long is 12.0% lower than yesterday and 18.2% lower from last week, while the number of traders net-short is 15.3% lower than yesterday and 4.7% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURUSD prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EURUSD-bearish contrarian trading bias.
EURJPY TECHNICAL ANALYSIS: DAILY RATE CHART (SEPTEMBER 2018 TO September 2019) (CHART 4)
In our last EURJPY technical forecast update, it was noted that “the scope of the reversal today speaks to potential for a greater reversal, particularly if the daily 8-, 13-, and 21-EMA envelope is broke to the topside: rates have closed below the daily 21-EMA every session since July 12. With daily MACD and Slow Stochastics starting to turn higher in bearish territory, a move above the daily 21-EMA would suggest a more significant EURJPY bottoming effort is afoot.”
There has been meaningful follow through in the bullish reversal attempt, now that EURJPY has returned above the 61.8% Fibonacci extension at 118.67 (Fibonacci extension of the September 2018 high to January 2019 low to March 2019 high move). EURJPY rates are above the daily 8-, 13-, and 21-EMA envelope which is shifting into bullish sequential order.
Meanwhile, Slow Stochastics has reached overbought territory while daily MACD continues to run higher (albeit in bearish territory). The path of least resistance may be higher at the moment, and if so, a return back to the descending trendline from the 2017 high may be in focus near 120.00.
IG Client Sentiment Index: EURJPY Rate Forecast (September 12, 2019) (Chart 5)
EURJPY: Retail trader data shows 60.4% of traders are net-long with the ratio of traders long to short at 1.53 to 1. In fact, traders have remained net-long since April 25 when EURJPY traded near 125.31; price has moved 4.6% lower since then. The number of traders net-long is 17.0% lower than yesterday and 15.9% lower from last week, while the number of traders net-short is 26.5% lower than yesterday and 10.6% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURJPY prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EURJPY-bearish contrarian trading bias.
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist
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UK Markets Wait For Supreme Court Ruling, Brexit Update
Sterling (GBP) News, Charts and Analysis – Webinar
- UK Supreme Court ruling due shortly
- UK PM Johnson to meet EU leaders on the sidelines at the United Nations
Q3 2019 GBP Forecasts and Top Trading Opportunities
UK asset markets are flat to slightly lower at the start of the week with traders waiting for the UK Supreme Courts ruling on whether PM Johnson’s recent shuttering of Parliament was legal or not. The judgement is expected early this week and will have a direct influence on UK assets one way or another.
This week PM Johnson will meet with European leaders at the United Nations General Assembly meeting to discuss the latest Irish backstop developments. Recent positive commentary has boosted the value of the British Pound until a report this weekend that European Commission President Jean-Claude Juncker sees a return to a hard border in Ireland pushed GBP lower.
There is a lack of front-line UK economic data this week to influence trading but speaches from BoE governor Mark Carney and other UK central bank officials should be followed closely.
GBPUSD has drifted lower through the session but has not threatened the recent 1.1959 low made earlier this month.
GBPUSD Price Daily Chart (January – September 23, 2019)
The IG Client Sentiment Indicator shows retail traders are 65.0% net-long, a bearish contrarian bias.
EUR/USD Price Slumps as Germany PMI Data Points to Recession
EURUSD Price Charts and Analysis:
- EURUSD may sink further as 1.1000 gives way again.
- Germany is expected to be in recession in Q3.
EURUSD Sinks as German Economic Woes Continue
The German economy is likely to fall into recession in the third-quarter of 2019, ‘as the downturn in manufacturing deepened and service sector growth lost momentum’, according to data provider IHS Markit. The composite index hit its lowest level since October 2012, while the manufacturing numbers are ‘simply awful’ according to the data provider. Germany is expected to enter an official recession in Q3 and may not see any growth this year.
According to Phil Smith, principal economist at IHS Markit, “The manufacturing numbers are simply awful. All the uncertainty around trade wars, the outlook for the car industry and Brexit are paralyzing order books, with September seeing the worst performance from the sector since the depths of the financial crisis in 2009. “With job creation across Germany stalling, the domestic-oriented service sector has lost one of its main pillars of growth. A first fall in services new business for over four-and-a-half years provides evidence that demand across Germany is already starting to deteriorate.”
EURUSD continues to point lower and may re-test the two recent low prints around 1.0925 made earlier this month. Below here there is very little in the way of strong support. There is a gap in April 2017 on the weekly chart between 1.0777 and 1.0821 which is likely to be filled in the short-term, before the January 2017 low at 1.0340 comes into play. In the current environment is looks very unlikely that EURUSD will break back above the cluster of lows/highs around 1.1100 and 1.1120.
EURSUD Price Daily Chart (January – September 23, 2019)
The IG Client Sentiment Indicator shows retail traders are 65.0% net-long of EURUSD, a bearish contrarian bias.
US Dollar ASEAN Outlook Bullish, Trade Deal Hopes Fade, PHP at Risk
ASEAN Fundamental Outlook
- US Dollar remained in persistent consolidation mode against ASEAN FX
- Drop in US-China trade deal hopes to fuel USD gains on haven demand
- Philippine Peso also eyeing central bank rate decision, SGD to CPI data
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US Dollar and ASEAN FX Weekly Recap
At first glance, the US Dollar seemed to outperform against its major counterparts when using an equally-weighted index this past week. But the reality is that from a technical standpoint, the Greenback is still in a persistent consolidative mode since the end of July. Its lack of commitment also spread into against some of its ASEAN and Southeast-Asia fiat counterparts.
A couple of notable exclusions this past week were the Singapore Dollar and Indonesian Rupiah – see chart below. The former tends to closely trace the Greenback. The IDR saw most of its decline during the front-half of the week, when an attack on Saudi Arabian energy infrastructure caused an oil shock that triggered risk aversion. The commodity has since partially subsided as markets turned to the Fed and US-China trade talks.
The US central bank delivered its second interest rate cut, keeping the door open to “extensive cuts” should they be needed. Meanwhile, the Bank of Indonesia delivered a third reduction in benchmark lending rates this year. But the Rupiah was left unchanged as the central bank reiterated efforts to guard their currency. Prior to Friday’s close, ASEAN currencies suffered as Chinese delegation teams canceled trips to US farms.
Check out my Singapore Dollar currency profile to get acquainted with its unique character in markets!
US-China Trade Deal Hopes Once Again Diminish
Once top-tier economic event risk passed last week, it was clear how important US-China trade talks were to financial markets. As mentioned earlier, once reports crossed the wires that Chinese officials canceled trips to farms in Montana and Nebraska, aggressive risk aversion kicked in. The MSCI Emerging Market index covered its upside gap from the onset of Friday’s session as US government bond yields tumbled.
The actions from Chinese officials were in response to comments from US President Donald Trump, who mentioned that he would not accept a partial deal, adding that ending the trade war by 2020 is not his priority. Taking a look at the next chart below, prospects of the two nations agreeing to an outcome has helped to drive capital flowing back into emerging markets since late August.
His lack of interest in wanting an interim deal diminished prospects of an agreement, which can be viewed by the reaction in financial markets on Friday. Talks between the two nations restarted this past week ahead of a high-level meeting anticipated between the economic powerhouses in the middle of October. This is why the US delayed imposing additional $250b in tariffs on China by two weeks to around the same time.
With trade wars still are a persistent threat to global economic health, this bodes ill for risk capital and will likely adversely impact currencies such as the Philippine Peso, Malaysian Ringgit, Singapore Dollar and Indian Rupee. Meanwhile, the highly-liquid US Dollar – still increasing its dominance as the world’s most widely-traded currency – is likely to benefit against them.
ASEAN Economic Event Risk
Focusing on ASEAN regional economic event risk in the week ahead, a top-tier item will be the Philippine central bank interest rate announcement. Much like the easing that we have seen from central banks in the world, the BSP is anticipated to continue the trend. The benchmark lending rate is widely expected to be lowered from 4.25 percent to 4.00 on Thursday.
As such, its surprise factor is diminished, with the central bank governor also hinting at further reductions in reserve requirement ratios. This does mean however that the Philippine Peso will continue to lose its yield advantage (alongside MYR, IDR) which is a long run threat for the currency. Inflation data will also be eyed out of Singapore and Malaysia.
For timely updates on ASEAN and Southeast Asia currencies, make sure to follow me on Twitter here @ddubrovskyFX
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— Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com
To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter
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