Euro Steady as Markets Wonder – Will ECB Cut?

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Market Drivers for November 7, 2013
AU jobs miss big taking Aussie below 9500
Markets await ECB
Nikkei -0.76% Europe -0.46%
Oil $94/bbl
Gold $1315/oz.

Europe and Asia:
AUD Employment 1.1K vs. 10.3K
AUD Unemployment rate 5.7%

North America:
GBP BoE Rate decision 7:00 AM
EUR ECB Presser 8:30 AM

The euro was essentially unchanged ahead of the key ECB rate policy meeting with markets divided as to whether the central bank will cut its benchmark rate. The EUR/USD traded in a very narrow range holding above the 1.3500 level for all of Asian and early European trade as currency markets prepared for the ECB rate decision and pressed due later today.

Some analysts believe that given the lackluster growth and the strong disinflationary trends in the region, the ECB may cut its benchmark lending rate by another 25bp to 0.25%. However, the ECB tends to be relatively cautious in its policy actions and Mr. Draghi may choose to wait a bit longer before committing to such a dovish move. With rates already near zero level the ECB may feel that there is little benefit from lowerings them by another 25bps.

There is no doubt however, that the ECB should become more accommodative in order to stimulate in the region. EZ growth is projected to remain negative in 2013 and rise only slightly to just above 1% in 2014. Meanwhile inflationary pressures are practically non-existent with prices well below the central banks 2% target.

The ECB has actually been in a stealth tightening mode as it pared down its balance sheet while the other G-4 central banks have been steadily expanding theirs. Therefore it is quite likely that Mr. Draghi could hint that the ECB will expand and extend the LTRO program – which has been the bank’s favored way to add stimulus to the economy.

Mr. Draghi may also try to talk down the currency as the EUR/USD high exchange rate has become a key source of concern for the corporate sector. This earnings season, CEO after CEO of European companies, blamed weaker than expected results on the spike in exchange rates.

Still its is unclear just how much of an impact today’s press conference may have as markets are likely to wait until tomorrow’s NFP data to fully make up their minds as the near term direction of the pair. For now EUR/USD sees support at 1.3450 and resistance at 1.3600 and could stay within those ranges unless Mr. Draghi makes a dramatic policy change.

Elsewhere in Australia the data on the employment front proved to be a large disappointment with jobs rising by only 1.1K versus 10.1 K eyed. Most troubling of all was a whopping decline in full time jobs by -27K which suggests that economy Down Under may be weaker than consensus view.

The Aussie has rebounded strongly over the past several months on the assumption that the RBA has reached the end of its rate tightening cycle, but if the labor conditions continue to deteriorate the central bank may ease further. AUD/USD dropped below the 9500 figure in the aftermath of the news, but remains supported above the 9450 level. However, tonight’s results may begin to dampen investor sentiment and the pair could drift towards 9400 over the next several days.

Boris Schlossberg
Managing Director

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