All Eyes on the ECB This Week
Risky assets continued on the bid for the third week in a row and oil followed suit, taking out 2016 highs at 34.79, which now act as support. Equities enjoyed from the beginning of the week better terms from China and the week ended with a solid, yet somewhat mixed report from the US labour market and the mixed inputs from macro data in general. US Housing showed weaker Pending Home Sales, which was offset by somewhat stronger than expected ISM indices in manufacturing and service. In FX markets, the US Dollar suffered more or less across the board, GBP recovered some of the lost ground in 2016 and commodity-currencies enjoyed a relief in commodity prices, especially favouring the AUD due to its high correlation with gold, which printed 2016 highs last week.
This week, the key focus point will be the ECB monetary policy meeting on Thursday, where market participants are expecting a cut of the deposit rate of 10bp with some changes to the QE as well. In light of recent statements and the current market doubt on the central bank actions in general, the ECB must not disappoint expectations. We have recently witnessed deflationary pressure and risks to the downside in the growth outlook, which means that the ECB has to incentivise the system to take on additional investments in order to balance growth. ECB’s aim is price stability, and they markets are currently pricing in a 10bp cut on Thursday and 30bp cut before year end. Should the actions from the ECB be sufficient enough to satisfy the market, we could see additional risk taking in equity markets, while the EUR should be offered. Technically, EUR/USD was rejected at the 200-DMA on Friday and the current wedge which is forming tells that something’s got to give. Volatility is likely to go down ahead of Thursday, but with the current setup and the risk of the ECB not delivering, we prefer a buy on dips towards the current wave low at 1.0825-area.
On the monetary side, we also have central bank actions from Canada, Malaysia, Poland and New Zealand, but expect no changes in the benchmark rates of neither. The AUD is very interesting from the recent developments with AUD/USD closing above the the double top and 200-DMA last week. So far, we have seen offers around the July/August 2015 highs, but could see this a temporary pull-back before bids re-entering. Support at the recent break-out level at 0.7385 before 0.7340 while resistance is seen at 0.7490-area before 0.7535.
In China, the National People’s Congress have started their 10-day annual meeting, which most likely will cause some stir in the markets as well. China, still being the joker for pushing the global economy forward, will discuss the policy actions taken and asses what is needed to curb the slowdown in the economy. From the US, we have no significant data this week.
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