Will ECB Confirm QE?

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Market Drivers December 4, 2014

All eyes on ECB
AU retail sales beat but pair posts fresh lows
Nikkei 0.94% Europe .13%
Oil $67/bbl
Gold $1204/oz.

Europe and Asia:
AUD Retail Sales 0.4% vs. 0.1%

North America:
UK BOE Rate decision 7:00
EUR ECB Rate Decision 7:45
EUR ECB Presser 8:30
USD Weekly Jobless 8:30

Currencies remained in narrow tense ranges ahead of the key ECB meeting later today with traders waiting to see if Mr. Drahi and company will provide a definitive time for the start of QE in the region. Earlier, the euro managed to break below the 1.2300 level posting fresh lows at 1.2295 before rebounding slightly to 1.2320 in morning London dealing.

The pair has been in a freefall this week as most market participants anticipate that Mr. Draghi will provide a clue as to the central bank’s plans to dramatically expand its balance sheet starting Q1 of next year. While no one expects Mr. Draghi to provide a clear confirmation of start date, traders will be watching his tone to see if the ECB chief is firm in his guidance to initiate QE next year.

Mr. Draghi still faces opposition from Germany on implementing large scale monetary maneuvers that would involve the buying of member nations sovereign debt and today’s press conference will be a test of his resolve and determination to proceed with a simple majority vote of the council and without the consent of the Germans.

The market is very much primed for a dovish announcement from ECB and positioning has been heavily skewed to the downside so there is a small chance that the pair could squeeze higher on any disappointment of a clear cut message from Mr. Draghi. However any rally is likely to be short lived as the ECB will ultimately have to commit to some sort of accommodation in order to stimulate demand in the region.

Elsewhere the dollar rally continued unabated with USD/JPY coming to within a pip of the 120.00 barrier while Aussie fell to fresh lows at 8358. Earlier better than expected Australian Retail Sales provided a boost for the pair after the numbers printed at 0.4% versus 0.1% eyed but the enthusiasm was short lived.

The sentiment towards the AUD/USD has changed radically this week after a shockingly weak GDP reading yesterday and the market is now much more receptive to the prospect of a rate cut from the RBA should growth slow down further. As late as last week the conventional wisdom was that the RBA would remain neutral for the foreseeable future. With rate expectations now tilted towards easing the pair remains under heavy selling pressure from spec liquidation as rate differentials between US and AU yields continue to compress.

With no major releases on the docket today, Mr. Draghi will control the trade in FX during North American session and if he comes out as dovish as the market expects the pair will likely set fresh lows as the day progresses.

Boris Schlossberg
Managing Director

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