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 Friday 08 September 2017

Euro storms higher - AM Briefing

 

 

Early moves

·         EURUSD breaks above resistance

·         Geopolitical tensions remain stretched

The euro continues to storm higher while the dollar has slumped following yesterday’s ECB meeting. The Dollar Index has crashed through 92.00 - the low from summer last year and is now trading at its lowest level since early 2015. Meanwhile, the EURUSD has broken above resistance around 1.2000 - an area which previously acted as significant support in 2010 and 2012.

There’s little doubt that momentum is to the upside for the euro, although we shouldn’t be surprised to see some profit-taking come in. However, it looks unlikely that this will come ahead of a weekend when there’s a risk of further provocations from North Korea. South Korean Prime Minister Lee Nak-yon has warned that the rogue state could be planning to launch a missile tomorrow. The 9th September marks the founding anniversary of North Korea.

Stock Index Update

·         Bank stocks lead Wall Street lower

·         European equities little-changed after ECB meeting

US equities came under pressure last night led lower by banking stocks. Investors are trimming back their exposure to financials as bond markets rally and yields fall. Earlier this week the yield on the key US 10-year Treasury fell below 2.10% for the first time since early 2016. It is now on course to break the 2% level and is trading at its lowest level since November last year.

There was a firmer tone across European equity markets yesterday as investors awaited the ECB’s monetary policy statement and Mario Draghi’s subsequent press conference. The general expectation was that the central bank would leave rates and monetary policy unchanged and this was exactly what happened. There was no alteration to the monthly bond purchase programme which will continue to run at €60 billion per month until the end of this year or beyond. The statement also said that this quantitative easing could be increased in size and/or duration should the economic outlooks worsen. This form of words was unchanged from previous statements and overall this was taken as being mildly dovish. The major European stock indices rallied modestly as the euro slipped a touch. However, the single currency subsequently shot higher as Mario Draghi’s press conference took place. This was despite the ECB President saying he was determined to lift inflation towards its 2% target area. This would suggest that the ECB will begin to wind down its €60 billion per month bond purchase programme in early 2018.

Commodities Update

·         Oil slips after inventory update

·         Gold and silver shoot higher

Crude prices were steady throughout yesterday morning’s trade. Overall there was relatively little movement ahead of ECB President Mario Draghi’s press conference and the latest update on US inventories from the Energy Information Administration (EIA). Crude oil was relatively unaffected by the ECB, despite a sharp sell-off in the dollar which could have triggered buying. But prices drifted lower later in the day following the EIA inventory update. This showed an increase of 4.6 million barrels in crude stockpiles - well above the 4.1 million expected. This also supported the update from the American Petroleum Institute (API) on Wednesday night with both sets of numbers representing the biggest build in crude supplies in five months. However, traders were wary of responding too aggressively to these latest updates as the numbers are likely to be skewed by the damage wrought by Hurricane Harvey. So the data release simply triggered some mild profit-taking.

Gold and silver were steady in early trade yesterday with a small upside bias. This was quite positive in terms of market sentiment as both metals made back losses suffered in Wednesday’s US session. Traders prepared themselves for the ECB’s monetary policy statement and Mario Draghi’s subsequent press conference. While no one expected any changes to monetary policy, many commentators thought there was a very high probability that Mr Draghi would try to take the wind out of the euro’s rally. If so, that could have led to a sharp dollar rally with the risk of a knock-on sell-off in the two precious metals. As it happened, the ECB did leave monetary policy unchanged, as well as the language which stated that QE could be increased in size/duration should the economic outlook deteriorate. But gold and silver flew higher along with the euro. Investors seem convinced that the bond purchase programme will be wound down, even if it depresses Euro zone inflation. At the same time, the dollar fell sharply against all the majors. The USDJPY has now fallen below support around 108.00. Investors raised their exposure to safe havens such as the yen, Swiss franc and precious metals.

Forex Update

·         Draghi promises to deliver inflation

·         But this suggests more stimulus required

Ahead of yesterday’s meeting the big question was if Mr Draghi would attempt to “talk down” the euro. This came about as minutes from the ECB’s last meeting showed how concerned the Governing Council was over the single currency’s strength. Euro strength weighs on exports, makes imports cheaper and dampens inflation. As with the US Federal Reserve, low inflation is holding back the ECB’s ability to normalise monetary policy. The last thing the ECB wants to see is the EURUSD break and consolidate above 1.2000. Yet talk of reducing stimulus puts further upside pressure on the single currency. Mr Draghi said that the euro was a source of uncertainty, but that the ECB was determined to deliver inflation. The trouble is that this suggests an extension to the central bank’s bond purchase programme while growth across the Euro zone is “robust and broad-based.” Analysts have been expecting the ECB to provide details about winding down monetary stimulus. Mr Draghi said these would come at the October meeting. However, he’ll need to ensure this is done at a glacial pace to avoid sending the euro even higher.

Technically the EURUSD is trading around a highly significant level. The area around 1.1900/1.2050 acted as important support in the summers of 2010 and 2012. It sliced through here in early 2015 and went on to hit its lowest level since December 2002 at the beginning of this year. This low of 1.0340 proved to be the launch pad for a rally which has seen the euro rise over 15% so far this year. Half of this rally has taken place over the last ten weeks.

Upcoming events

Today’s significant events and economic data releases include UK Manufacturing Production, Goods Trade Balance, Industrial Production and Inflation Expectations. From the US we have Wholesale Inventories and a speech from Federal Reserve Bank of Philadelphia President and FOMC-voting member Patrick Harker.

Disclaimer:

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Posted by David Morrison

Category: AM Bulletin


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