ECB Underwhelms Calls, EUR Overwhelms Sellers

The EUR index has surged ferociously off its fresh yearly low after a +1.3% U-turn as the decision by the ECB underwhelmed market participants even if took a while for the market to react, first cleaning out all the weak-handed long-players before the snap back up.

The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube. You can also subscribe to the mailing list to receive Ivan’s Daily wrap.

Quick Take

Draghi underwhelmed in the delivery of the ECB easing package, leading to (eventually) sellers being overwhelmed by the buy-side pressure. In the end, even if this time the cleanout of weak-handed longs went deeper than the last ECB disappointing meeting on July 25th, it was Deja Vu all over again (sell the rumor, buy the fact), as the market could not justify such a depressed EUR valuation after the ECB  did the bare minimum to satisfy the overly dovish expectations, judging by the EUR behavior in recent weeks. The Swissy, this time detached from the shackles of its over-dependence in 'risk-on' flows, manage to find buying interest as it piggybacked the EUR from the distance. Surprisingly, and probably a testament of how over-extended these markets are, the AUD, NZD, CAD all pared back gains after the ECB even if bond yields and equities continue to rise in tandem as the US and China keep sweeting the risk appetite with a more constructive tone in the latest headlines. The USD continues to trade steadily when crosschecking its performance against G8 FX (not against the EUR as a standalone view), while the JPY sellers remain in the pain cave with not yet an end in sight. Lastly, the Sterling keeps behaving as one of the most unexciting currencies to get involved in as the flow of Brexit news peters out due to the UK parliament suspension.  

The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

ECB does the bare minimum expected: The ECB decision underwhelmed the market expectations, eventually leading to ‘sell the rumor buy the fact’ type of move in the Euro, which ends as the top performer. The cut in the deposit rate by 10 basis points to -0.50%, a ‘tiered’ negative deposit, the reintroduction of QE by an amount of €20 billion as from 1 Nov and the extension of the TLRO maturity from 2 to 3 years, was the least one could have expected and certainly not the bold action necessary to keep the selling pressure in the Euro. ECB President Draghi expressed a commitment to keep QE open-ended until inflation “robustly converges to a level sufficiently close to, but below 2%.” Given the bleak outlook for the European inflation, where the latest CPI forecasts were downgraded to 1.2% in 2019, 1% in 2020 and 1.4% in 2021, QE seems to be here to stay.

Notable split in the ECB decision: A EUR bullish headline made its way through the US session after Bloomberg revealed that the ECB decision was a very disputed one as the central banks governors of France, Germany, the Netherlands, Estonia, and Austria alongside two Executive Broad members (Sabine Lautenschlaeger and Benoit Coeure) felt the launch of QE was premature and patience was warranted until a sharper Eurozone economic slowdown. 

Time for fiscal collaboration to the rescue: Besides, the fact that Draghi mentioned “fiscal policy should become the main policy instrument” is an admission that the set of policy tools by the ECB is rapidly exhausting and is time for a much stronger coordination between the fiscal and monetary policy agents to bolster growth, which is a message also emphasized by the incoming new ECB President Lagarde.

Case for Fed's strong easing decreases: The US core CPI came slightly better-than-expected at 0.3% vs 0.2% expected, which raises further questions about the justification by the Fed to be aggressive in cutting rates. The Fedwatch tool by the CME is now pricing an 89% chance that the Central Bank will slash its benchmark rate by 25bp, with an 11% pricing that the Fed will stand pat. The trend in the future rates curve is clearly in recess ever since the kickback in risk appetite last week.

Change of heart in Trump's trade approach? A report by Bloomberg that the US is strongly considering a rethink over China tariffs ahead of the next senior-level round of trade talks in early Oct is a factor that keeps risk underpinned. In exchange, China should show a willingness to address the IP issues and greater amounts of agricultural purchases, according to ‘five people familiar with the matter’. Even Trump tweeted “It is expected that China will be buying large amounts of our agricultural products!” Bloomberg notes that Trump is yet to sign off on the deal, which would be seen as a truce rather than an overarching deal that puts all the issues to bed.  

A resurrection of the old trade deal? A helping hand in the risk buoyancy came courtesy of a Politico report, titled ‘Trump team rushes to find escape hatch for China tariffs’, stating that "Trump's top advisers are rushing to find an escape hatch for a series of tariff increases in the coming months, worried about the potential for further economic damage.” Many of the president's top economic officials, according to the report, “are trying to resurrect the terms they previously were negotiating with China, a deal 90% done."

Gestures of goodwill by both sides? The WSJ also carries an encouraging report about “China looking to narrow the scope of its negotiations to only trade matters” as a return gesture of goodwill after Trump delayed the imposition of another round of tariffs last night from Oct 1 to Oct 15. "Chinese negotiators are making plans to boost purchases of U.S. agricultural products, giving American companies greater access to China's market and bolstering intellectual-property protections, these people said." These continue to be the right sound bites.

Fitch report a potential red line for Trump: A report by Fitch warns of the impact that Chinese tariffs are having on US agriculture, which should act as a factor that contributes to a possible relaxation in Trump’s hard-line stance against China, as the last thing he wants is to see US farmers suffer further hardships by the tariffs. Fitch notes that “Chinese tariffs on US agricultural imports escalate trade-related risks to US farm sector, which is experiencing falling sales and land values,'' adding that the “ongoing trade wars impact equipment loan, lease ABS collateral performance and place greater pressure on already stressed US agricultural sector.”

Leaked report hints EU agrees on Brexit delay: While hardly surprising, Business Insider seems to have had access to a leaked resolution in which it was determined that the EU will grant another Brexit extension if no deal reached by Oct 31. The report notes “the resolution is due to be approved by members of European Parliament next week”, adding that “the members will also support a fresh Brexit delay to create time for a general election or a referendum, the resolution says.”

Hungary to throw a lifeline to UK PM Johnson? According to a Bloomberg report, the EU fears Johnson is plotting to persuade Hungary to veto a Brexit delay. If the noise around the Hungary assisting Johnson's plot to force the UK out of the EU with or without a deal increases, as the article notes, "it would dramatically raise the risk that Britain will fall out of the European Union without a deal", which ironically would make the EU more flexible to find creative ways to solve the sticking point of the Irish border. As Bloomberg notes, "EU officials privately acknowledge they could do little to stop a rebel leader wielding their veto." Remember, all 27 EU nations must approve a Brexit delay. 

OPEC+ reinforces the commitment to output cuts: After Thursday’s meeting by OPEC+ members, the official statement read that “it is important for all countries to reach full conformity with output cuts,'' adding that “non-compliant countries have pledged to achieve 100% compliance.” The problem is that what in theory sounds like a positive headline, is much harder to get implemented as the mechanisms of enforcement are fairly limited given the sovereignty decision of each nation based on their best interests.

US retail sales, consumer confidence up next: The next key events before the end of the week, expected to inject vol in the USD, come in the form of the US retail sales and the preliminary University of Michigan consumer sentiment. The former is seen much lower than its previous reading while the latter is expected to print healthy levels above its previous month, according to economists’ median forecasts.

CBRT cuts aggressively, TRY bought: The Turkish Central Bank announced a large cut of its one-week repo rate to 16.50% from 19.75%, which is slightly above expectations between 250-300 bps. The Turkish Lira appreciated in a "buy the rumour, sell the fact" move. The Central Bank rationalized its decision based on the decreasing inflationary pressure in the country.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

A Dive Into The Charts

The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.

The EUR index has surged ferociously off its fresh yearly low after a +1.3% U-turn as the decision by the ECB underwhelmed market participants even if took a while for the market to react, first cleaning out all the weak-handed long-players before the snap back up. The index has now broken the baseline but there are significant risks that the bullish momentum may peter out at the current levels due to two main factors. Firstly, you usually tend to see a pullback of sorts after such an elongated one-day rise. Secondly, the index is now trading straight into a proven area of resistance as per the horizontal line drawn.

The GBP index has entered a low volatility period as the Brexit newsflows gets thinner since the UK parliament prorogation until Oct 14. Nothing has really changed technically speaking, with the currency deprived of further gains by a macro level of resistance as per the Dec ‘18 lows & July 25-26 peak. The overall outlook for the Pound continues to be rather bullish even if the short-term behavior is not revealing what the market intentions are. The fact that we’ve seen over a week of consolidation along the resistance borderline implies that further buying pressure is being applied to the sitting offers, which suggests growing risks of an upside breakout.

The USD index has been rejected above the baseline (13d ema) after a first quick look, but it’s far from suggesting sellers are set to return for now. A bit of a jolt in vol should be expected in today’s US retail sales and consumer sentiment data, with the technical risks, judging by the structure of the market, still skewed towards further appreciation even if that’s not yet confirmed by what I’d like to see, which is a solid close above the baseline with a pickup in aggregate tick volume. Touching on the structure, it’s worth emphasizing that any bullish successful rotation as seen in the index through late August followed by a retest of the low tends to attract value-seeking interest. Note, the fisher transform has also turned its slope bullish, while further attempts higher by the USD would also confirm the CCI above 0 for further validation of long positions. Again, this is just a technical projection with no actual price backup.

The CAD index keeps rolling back some of its recent gains as it tests a very relevant area of support where demand should arise given the confluence found. The valuation of the index has landed at the intersection of the baseline, which marries with a horizontal level of support and the origin of the demand that led to the latest surge in price. All in all, it looks like a great area for the CAD buyers to regroup at a value area. Fundamentally, the index should remain buoyed by both the recent domestic data and the ‘risk-on’ outlook in the market.

The AUD index has been rejected off a key level of macro resistance, with the printing of a sizeable upper shadow a warning sign that the bullish momentum is starting to wane. Under such a bullish momentum, I’d probably rule out the candle pattern as too relevant, but given that it’s occurred at a key technical level, it definitely holds more weight as it clearly communicates that the selling interest at such a macro-hot level is there. The overall outlook for the Aussie, which has been flying for more than 10 days in a row, remains backed up by the risk appetite mode, which is why playing shorts still remains a very dangerous proposition. If anything, the bearish candle pattern should be a warning to be more nimble in taking further profits off the table on evidence that the bullish inertia might be changing.

The NZD index has also rejected an area where an origin of strong supply took place, resulting in the printing of a sizeable bearish candle with a large upper shadow. The fact that the formation occurs at a critical supply area is significant as it translates into a clear rejection of higher levels, even if there is still not enough justification to be overly bearish on the index, especially on the positive news emanating out of the US-China about the trade talks. The fisher transform nor the CCI are not confirming the bearishness of this market either, although the aggregate tick volume does send the right message for sellers as the participation level went up.

The JPY index continues its path lower with the room for further depreciation before making contact with a critical macro support is narrowing, now about 0.5% from being tested approx. The Yen is on track to print its 8th losing day in a row, in what’s an unambiguous testament of the change in heart by the market as renewed hope exists of progress in global fundamentals short term after the barrage of positive news on Brexit, US-China trade, HK, Italy… To close the week, unless the JPY loses that extra -0.5%, I would expect a sell on rallies play today.

The CHF index has detached itself from a risk-sensitive play to instead piggyback the performance of the EUR, which tends to be a normal occurrence when the ECB meets. Technically, there is no evidence that suggests the currency won’t keep selling off as the main play the higher it goes, with a retest of the baseline ahead of a key line of resistance as the next attractive areas to engage in short-side business. Since the current pullback panned out is still not initiated off the perceived 100% proj target, I personally think the market has not yet hit its deepest pain point before a rethink of the daily directional bias. The risk dynamics are also not supportive of the Swissy in the short-term, which should weigh in the index.

Important Footnotes

  • Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
  • Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
  • POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
  • Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
  • Horizontal Support/Resistance: Unlike levels of dynamic support or resistance or more subjective measurements such as fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor. The Ultimate Guide To Identify Areas Of High Interest In Any Market
  • Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
  • Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
  • Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
  • Projection Targets: The usefulness of the 100% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100% Fibonacci Projection
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