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The calendar contains several interesting issues. France and, more importantly, Spain will sell government bonds. Especially the latter will be closely watched. The second reading of the EMU GDP and the Germany factory orders probably won’t cause a big market reaction just a few hours before the ECB press conference. Later today, the US ADP labor market report could cause additional volatility and the same is true for the US jobless claims. Tomorrow's main event is the US Nonfarm payroll report.
Today in the center ring is the European Central Bank meeting and statement by Mr. Draghi.
From a currency point of view, investors will look out whether there is a strong enough commitment from the ECB to buy peripheral bonds. An additional rate cut is probably a euro negative even as it might be supportive for sentiment on risk. The ECB communication on bond buying is some kind of a binary event. So, any prepositioning is highly risky. That said, we assume that the ECB framework on bond buying will be a compromise that is also acceptable for Germany. Conditionality is as such not per se negative, but markets might consider too much emphasis on conditionality as indication that the new system won’t be flexible and forceful enough. To put it otherwise, we are not sure that the message from the ECB will be concrete and strong enough for EUR/USD to move beyond the key resistance at 1.2693/1.2743. However, the devil will be in the details. For example, markets could be more clement short-term if the ECB starts buying Portuguese or Irish bonds.
The sterilization of the liquidity from bond buying should be a euro supportive. (The Fed and the BoE don’t sterilize the liquidity). The ECB crisis strategy will be the key driver for EUR/USD trading today. Of course the US side of the story is only just around the corner, with the payrolls being key input for the Fed to decide on more policy stimulation at the September meeting. So, there is still event risk to come, even after the ECB press conference. The nonmanufacturing ISM might bring the dollar side of the story again into the spotlights. Given the high degree of event risk, we don’t front-run on the decision and keep a close eye on the technical charts to monitor market sentiment.
Asian markets held close to the flat-line. Markets are hopefully looking at the ECB conference, with EUR/USD still holding within striking distance of the recent top.
EUR/USD trading was still technically driven as investors were awaiting the outcome of today’s ECB policy meeting. Recently, investors had reduced euro shorts as they prepared for a big step/change in the ECB crisis management. However, this repositioning ahead of today’s ECB meeting decelerated this week as EUR/USD was unable to break above the post-Jackson Hole top. What no longer could go up, finally came down. So, EUR/USD turned south on Tuesday and this process was extended during morning trade on Wednesday. EUR/USD settled the lower half of the 1.25 big figure.
Once again, there was little in the way of economic news to guide the EUR/USD price action. The final EMU services PMI was weak, but on average it didn’t bring much additional bad news. Technical considerations prevailed. The intraday correlation between EUR/USD and other markets (bonds, equities) was again not very tight. Nevertheless, deepening losses on the equity markets finally pushed EUR/USD to a correction low just north of 1.25. From there, the euro changed course again (this time in lockstep with equity markets). A poor bid in the German Bund auction was seen as an indication that investors still expect big ECB action today. Comments from German Fin Min Schaeuble (he saw the EZ in the same form next year) were also euro supportive. After all, this was just more nervous trading ahead of the today’s key ECB meeting. Early the afternoon, the inevitable quotes from anonymous sources with knowledge of the matter did again their job. These sources were quoted as saying that the bond buying plan would be unlimited. EUR/USD and risky assets jumped higher and the bund was sold. EUR/USD even regained the 1.2599 resistance. So, the recent top at 1.2638 came again within reach. The quotes of course didn’t remove uncertainty on what the ECB will effectively announce today.