All Eyes on ECB

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Market Drivers January 19, 2017
AU Labor data in line
All eyes on ECB
Nikkei 1.10% Dax -0.10%
Oil $51/bbl
Gold $1204/oz.

Europe and Asia:
AUD AU Employment 13.5K vs. 10K
EUR EU CA 36B vs. 29B

North America:
EUR ECB Rate 7:45
EUR ECB Presser 8:30
USD Housing Start/Building Permits 8:30
USD Philly Fed 8:30
USD Weekly jobless claims 8:30

The dollar ran into a wall of sellers ahead of the key 115.00 barrier in Asian and early European trade today after posting a very strong rally in the wake of yesterday’s speech by Fed Chief Janet Yellen.

It was difficult to understand exactly why the greenback rallied so strongly yesterday, with short covering being the only reasonable explanation. Although Ms. Yellen reaffirmed Fed’s commitment to further tightening and noted that US economy was nearing full employment, she remained circumspect as to the number rate hikes the Fed will consider this year, noting only that she expects to raise rates “a few” times in 2017.

Mr. Yellen generally couches her statements in careful wording, but the net takeaway from her remarks was that baseline scenario of 2 rather than 3 rate hikes remains in place in which case the rally in the dollar may have been overdone.

Elsewhere in overnight trade AU employment data printed more or less in line at 13.5K versus 10K eyed. The employment situation in Australia has remained remarkably robust despite the slowdown in demand from China with labor conditions steady for more than seven months. Given the generally positive albeit slow growth in the Australian economy, some analysts including those from Goldman Sachs are calling for RBA to begin tightening once again by 2018.

Meanwhile, in North America today, the focus will shift across the Atlantic as the ECB holds its monthly press conference. It is not expected to change its monetary policy stance. However, traders will be watching carefully to see if the recent improvements in Eurozone data will prompt Mr. Draghi and company to begin discussing the prospect of tapering central bank’s QE program. When the ECB council last met Draghi completely dismissed the idea of unwinding their Quantitative Easing program by tapering asset purchases. The ECB clearly did not want to jeopardize the fragile recovery by taking any steps that could reverse the uptrend in growth and inflation.

One month later, the economy has clearly improved with inflation and manufacturing activity on the rise, although core CPI remains at one-half the central bank’s 2% target. The weakness of the euro has gone a long way in supporting the economy and boosting inflation leading ECB member Villeroy to say that growth will be solid in 2017.

Any recognition of tapering would be viewed as euro positive by the market but Mr. Draghi may hold off in making any overt remarks for fears of driving EURUSD back above the 1.1000 level. The euro has found support several times near the 1.0400 figure and unless Mr. Draghi is unexpectedly dour and dovish, that level should hold for the foreseeable future. Meanwhile, Mr. Draghi is also likely to remain neutral on the issue of tapering which could result in one of the more sedate press conference events in recent memory.

Boris Schlossberg
Managing Director

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