Market Drivers October 25, 2018
All eyes on ECB
Nikkei -3.72% Dax -0.16%
Europe and Asia:
USD Durable Goods 8:30
EUR ECB Presser 8:30
The dollar was stronger in Asian and early European trade today with USDJPY recovering to a high of 112.35 after dropping through the 112.00 in early Asia dealing.
Risk sentiment improved in Europe with Dax trading essentially flat after Nikkei tumbled more than -3% in today’s trade. Overall, however, FX markets were very quiet with traders marking time until the ECB presser later today at 12:30 GMT.
On the eco front, the German IFO printed just slightly below forecast at 102.8 versus 103.0 with the familiar themes of Trade War and Brexit weighing on sentiment. IFO reading continues to tread multi-year lows as corporate executives seek greater clarity on both risks. Yesterday’s disappointing flash PMI data was a clear indication that the collapse in sentiment is starting to translate into deceleration in demand.
Today’s ECB meeting will be the primary focus of the day, although markets do not anticipate any change of policy. Still, despite ECB’s deep desire to normalize policy in the region as soon as possible, downside risks have increased markedly since the month prior. Most of the risk has come from the politics, with Italian budget battle dominating the headlines. A compromise on the issue does seem likely and the faceoff between Rome and Brussels could add to the pressure in Italian bond markets.
In addition to Italy, the German state of Hesse is holding elections this Sunday and Angela Merkel’s centrist coalition is expected to see historic losses which could make governing more difficult and could even trigger fresh elections. Ms. Merkel has been the glue that holds all of EU together and any threat to her leadership would be a much more serious blow to the euro than any spat with Italy. If Germany, which is the economic and political engine of Europe, sees an uptick in populist power, the threat to EURUSD could be existential.
Mr. Draghi, on the other hand, clearly prefers to ignore the brewing political risk and focus solely on monetary and economic growth. Today’s presser could be a sign of whether he acknowledges these external risks to his policy. If so, the EURUSD could see a further sell-off and could even test the 1.1300 level on assumption that QE may be extended longer for political rather than economic reasons. Mr. Draghi would be loath to admit that, but if his rhetoric is even mildly less assertive than before, the markets would interpret it as tilt towards dovishness and euro could continue to drop as the day progresses.