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Euro Boosted By Lack Of ECB Dovishness

Euro Boosted By Lack Of ECB Dovishness

The Euro found consistent buying interest as ECB President Draghi did not live up to the overdone dovish expectations the market had set up for.

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.

Quick Take

The Euro found consistent buying interest as ECB President Draghi did not live up to the overdone dovish expectations the market had set up for. Even if the ECB did push the forward guidance on rates into the first half of 2020 and details of a new round of cheap funding for banks was officially announced, Draghi offered us one of his most optimistic versions during the press conference. As irrational as it may sound considering the lay of the land from an economic standpoint, Draghi did downplay the downside risks on growth and inflation in what appears to be a clear preference to resort towards a 'wait-and-see' script while letting trade war-induced ramifications pan out. Another perfectly logical line of thinking is that the ECB has no choice but to be forced to strike a somehow more positive tone given the absence of further measures in its toolkit. Regardless, the market was happy to endorse the buying of Euros, which by default, led to a broadly weaker US Dollar, even if technically speaking, no much damage was done against its major peers (well-defined ranges established) ahead of the US NFP. It is precisely the outcome of today's US jobs report that is now the major focus, as it may or may not pose the potential risk to re-ignite further conviction over the notion that the Fed is en route to lower interest rates. 

Narratives In Financial Markets

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

  • The Euro finds strong demand as the ECB fails to sound committal on further easing measures to mitigate the clear downside risks in the economy. The European central bank did nonetheless extend forward guidance on rates, announced details of TLTROs III and confirmed a downgrade to growth and inflation forecasts for next year.
  • The ECB kicked expectations on rates further down the road by noting that will stay at current levels “at least through the first half of 2020”, from “at least until the end of 2019.”
  • The pricing of a new cheap bank funding (TLTRO III) was less generous, set to 10 bp above the MRO and 10bp above the deposit rate for banks reaching the ECB’s benchmark for net lending.
  • The ECB refrained from any referral towards a tiering system for the deposit facility, which means that the build-up of expectations about a rate cut remains overdone.
  • The ECB verdict from Economists at Nordea notes that “while the ECB took another small step towards exiting ultra-easy monetary policy today, Draghi was clear that further rate cuts and net asset purchases remain in the toolbox. Markets interpreted the message hawkishly.”
  • According to Economists at Morgan Stanley: “Given downside risk to growth, the European central bank appears ready to act in case of adverse contingencies. But it stopped short of announcing any other extra measure today, although Governing Council members raised the possibility of further guidance extensions, rate cuts and even restarting QE.”
  • ECB’s President Draghi, at the press conference, sounded irrationally optimistic, far from endorsing a full-fledged dovish policy outlook. Draghi said that the ECB “didn’t see any substantial worsening in the outlook”, adding that “The data are not bad.”
  • In a sign that Draghi wanted to strike a more positive tone, he also noted “We see no signs of deflation. The ECB is not resigned to having a lower inflation rate forever.”
  • US equities keep finding further buying pressure as news emerged that the US is planning on delaying the hike on Mexico’s tariff, even if US officials, including US VP Pence, said that the most likely scenario is still for a 5% tariff to come into take effect next week.
  • Trump said that a decision to impose further tariffs Chinese imports (worth $325m) will come after the G20 meeting at the end of the month.
  • NY Fed President and voting member on the FOMC spoke about policy, not explicitly endorsing rate cuts but without ruling out the possibility either. Williams said too low inflation is a more pressing problem today than it used to be, adding that “markets are speaking pretty loudly on where interest rate should go”, even if pointing out that “won’t force the Fed's hands.”
  • The IMF raised the 2019 US growth outlook to 2.6% from 2.3% with the caveat that deepening of ongoing trade disputes or abrupt reversal of recent everyone's financial conditions pose material risks to the US economy, adding the Fed should defer further interest rate hikes until there are greater signs of wager price inflation and a relaxation of trade tensions with China.
  • The Yuan suffers a fresh round of selling after PBOC Governor Yi Gang said China has lots of policy room if the trade war worsens, noting that “no yuan exchange rate number is more important than others”, while referring to CNH depreciation as not an unwise move.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO (Risk On, Risk Off Conditions)

US equities keep charging higher as the S&P 500 trades over 1% higher from its Wednesday’s close, underpinned by the current dovish expectations surrounding the next Fed move and hopes of a delay in the Mexican tariffs. The drivers taking stocks into higher ground are not lending the same amount of support to US bonds valuations as micro and macro flows turn back to bearish while the market structure in the US 30 year maturity also supports the negative technicals as the underlying macro script of a weaker global growth outlook and the pricing of lower rates by the Fed dominates.

By scanning through the value of the USD and the Yen, flows in the latter imply a certain degree of complacency as the depreciation in the Yen index towards its worst levels in June comes amid the bearish reversal in US yields, which suggest the currency is starting to look cheap. The weak momentum in the US Dollar is more a function of the stronger EUR post ECB, with the valuation of the world’s reserve currency now on a holding pattern until the US NFP outcome, which will be yet another important piece of the jigsaw to judge the odds of lower rates by the Fed in months to come.

When it comes to the assessment of Chinese assets as a barometer of the trade dispute between the US and China via the Shanghai Composite and the Yuan, the message is loud and clear. The market keeps refraining from endorsing any view other than the trade war is here to stay. The current valuations lead to the firm notion of a failure to make progress by month-end at the G20 summit. If that’s the case, a critical prerequisite for a more dovish Fed will most likely be met.

Latest Key Developments In FX (Technicals, Fundamentals, Intermarket)

EUR/USD: ECB-Led Demand But 1.13 Too Tough To Crack

GBP/USD: Range-bound Conditions Awaiting US NFP

USD/JPY: Projected Targets Drawn, US NFP To Dictate Next Move

AUD/USD: Defined Range With US NFP Next Catalyst

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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