Ahead of ECB, the Market Bets on Euro Strength

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Market Drivers September 7, 2017
EU GDP in line
EUR at week’s high
Nikkei 0.20% Dax 1.01%
Oil $49/bbl
Gold $1340/oz.

Europe and Asia:
AUD Trade Balance 0.46B vs. 0.85B
AUD Retail Sales 0.0% vs. 0.3%
EUR EZ GDP 0.6% vs.O.06%

North America:
EUR ECB Rate Decision 7:45
USD Weekly jobless 8:30
USD Non-Farm Productivity 8:30
EUR ECB Presser 8:30

Despite continuing leaks from ECB over the past several weeks that European monetary policy is not about to change, the market bid up the EURUSD ahead of the ECB decision today taking it to week’s highs above 1.1970.

There was a bit of confusion in late morning European trade when Reuters reported that ECB would announce monetary policy decision after 11:45 GMT – this usually suggests that Mr. Draghi would read a prepared policy statement during the monthly presser at 12:30 GMT. That headline was quickly corrected suggesting that no new policy shifts would occur today. Nevertheless, the euro remained bid and looked eager to retake the key 1,.2000 level.

On the economic front, EZ GDP came in line printing at 0.6% for the quarter and a bit better on annual at 2.3% confirming that the region is experiencing one of its best growth spurts in years. This is precisely why the market remains bullish euros as growth in the EZ appears to be accelerating while growth in US is moderating. Despite low underlying inflation and a strengthening currency, the market is betting that Mr. Draghi will have no choice but to wind down QE before the end of the year.

Unless Mr. Draghi specifically states that QE will remain in place well into 2018, the EURUSD is likely to rise post ECB presser as sentiment towards the unit remains bullish. For now the recent multi-year highs above 1.2050 will be the first target of the longs as they look to take out the stops if Draghi does not turn dovish.

Boris Schlossberg
Managing Director

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