Taper Tantrum or EUR Slump – It’s in Draghi’s Hands

Earlier in the Day:

Macroeconomic data through the Asian session was limited to September trade data out of New Zealand, which provided yet another disappointment for the Kiwi Dollar this morning, with a narrowing in New Zealand’s trade deficit falling short of forecasts, pulling the Kiwi Dollar down from $0.6894 to $0.68877 upon release, before the Kiwi recovered off the back of some U.S Dollar weakness stemming from the U.S session on Wednesday.

While the Kiwi is up 0.03% at $0.689 at the time of writing, it’s certainly not out of the woods, with economic data and sentiment towards monetary policy, not to mention the likely plans of the coalition government pegging back any near-term recovery.

U.S Dollar weakness was reflected across the Asian majors this morning, with the Aussie Dollar managing to hold against the U.S Dollar following the disappointing 3^rd quarter inflation numbers, flat at $0.7705, and the Yen up 0.19% at ¥113.55 against the Dollar at the time of the report.

Macroeconomic data out of the U.S on Wednesday provided little support for the Dollar through this morning’s session on concerns over tax reforms and who will be the likely FED Chair come February, though strength in both the EUR and the Pound has added to the Dollar’s woes.

On the equity markets, the market reaction to earnings left Asian equities a little jittery ahead of this afternoon’s ECB monetary policy decision and press conference, with the ECB’s plans for the asset purchasing program for next year due to be announced, though the CSI300 seemed to be in a world of its own through the session, gaining 0.78% at the time of writing in response to news of China’s new leadership team, shrugging off any concerns over U.S earnings. Risk appetite in the coming weeks will now be hinged on economic and industrial development plans made during the National Party Congress, together with any intentions by the government to address the much talked about debt levels at corporate level.

The Day Ahead:

Economic data through the day is on the lighter side, with stats out of the Eurozone limited to Germany’s November consumer confidence figures.

The EUR has been in recovery mode ahead of this afternoon’s ECB monetary policy decision and the more important press conference, with plenty of speculation over the anticipated tapering to the asset purchasing program for next year dictating the direction for the EUR.

From a market perspective, the general consensus is that the ECB will want to avoid a taper tantrum later today and avoid delivering a more hawkish than anticipated tapering plan for next year, which could see a middle of the road tapering, with the size of the monthly purchases halved and for the program to be extended until the end of next year. Such a move would allow the ECB to then tweak going through the first half of next year depending upon growth and inflation.

Following the ECB President’s recent statement that inflation looks set to accelerate in the near-term, ECB inflation and economic growth expectations will also be a factor for the markets to consider, anything hawkish likely to provide the EUR with a boost to $1.20 levels                and beyond, based on a middle of a road tapering outcome and, while the ECB has continued to air its concerns over EUR appreciation, it’s going to be need to be dovish to peg back the EUR, with economic indicators continuing to favour a shift in policy.

At the time of the report, the EUR was up 0.08% at $1.1823, with today’s ECB Press Conference and policy decision key to the direction of the EUR near-term.

With no material stats out of the UK this morning, the Pound may struggle through the rest of the day as confusion over how the BoE will interpret the 3^rd quarter GDP numbers and recently weak stats out of the UK. Stats have softened amidst rising inflationary pressures. The UK economy’s resilience through the 1^st three quarters has been impressive, but with wage growth continuing to lag behind inflation, domestic consumption has begun to feel the heat and things could get worse should there be no action, either by the UK government or by the BoE.

The Pound was flat at $1.3262 at the time of writing, with the direction of the Dollar through the U.S session also needing to be considered through the day.

Across the Pond, stats are limited to the weekly jobless claims figures together with September goods trade and pending home sales numbers. There will need to be a material deviation from forecasts for the Dollar to see any significant moves in response to the numbers, with the Dollar Spot Index now in the hands of Draghi and Trump’s tax reforms and FED Chair choice.

At the time of writing, the Dollar Spot Index was down 0.16% at 93.563, eating into recent gains and the hope of a Dollar revival, though it’s certainly too early to be writing off the Greenback just yet.