Daily analysis | 08 September 2017
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Yesterday, the European Central Bank decided to keep all three of its interest rates unchanged as was widely expected. In the statement accompanying the decision, the Bank left untouched the sentence saying that the QE can be expanded in needed, which was also more or less expected following last week’s sources. EUR/USD slid only 30 pips at the time of the release but surged less than an hour later on Draghi’s comments at the press conference following the decision.
At the conference, Draghi tried to jawbone the common currency several times. He noted that the recent volatility in the euro requires close monitoring and that it is a source of uncertainty. When asked by journalists if the recent appreciation of the bloc’s currency has tightened financial conditions, the President replied that it has “unquestionably” done so, but conditions remain supportive. As for the QE program, everything he said was more or less in line with what last week’s sources suggested, expect from the part that the ECB should be ready to take the bulk of a decision in October, which may be the main reason behind the euro’s surge.
EUR/USD shot up at the time of the conference, broke above the psychological hurdle of 1.2000 (S1), and continued to trade north even in the aftermath of the event. During the Asian morning Friday, the pair hit resistance fractionally below 1.2100 (R1). The price structure continues to suggest a medium-term uptrend and thus we would expect a clear break above 1.2100 (R1) to open the way for our next resistance of 1.2170 (R2).
Now looking ahead, our own view is that the Bank may indeed slim down its monthly purchases to EUR 40bn in October, but we expect it to keep intact the aforementioned sentence with regards to QE extension, in order to maintain flexibility to adjust if unpredicted risks materialise. Basically, we expect the Bank to act in a similar manner as it did in December. The risks to that view relate to the euro, which if it continues to appreciate at such a rapid pace may weigh further on the inflation outlook and thus, prevent policymakers to take a decision at the October gathering.
As for today’s events:
The most noteworthy data set we get is Canada’s employment report for August. Expectations are for the unemployment rate to have remained unchanged, while the net change in employment is expected to have risen. On Wednesday, the BoC decided to hike rates by another 25bps (basis points), while it noted that future policy decisions will be guided by incoming economic data and financial developments as they inform the outlook for inflation. They also noted that consumer spending remains robust, underpinned by continued solid employment and income growth. As such, investors are likely to pay extra attention to this report as they try to assess the probability of another rate hike in 2017. At the time of writing, that probability is around 60% according to Canada’s Overnight Index Swaps and could rise further if the jobs report shows another month of stellar employment gains.
USD/CAD continued trading south yesterday, breaking below the support (now turned into resistance) barrier of 1.2120 (R1), marked by the low of the 18th of June 2015. The medium-term outlook of the pair remains negative and thus, we expect the dip below the 1.2120 (R1) hurdle to set the stage for extensions towards the psychological zone of 1.2000 (S1). The catalyst for such a slide may be a strong employment report from Canada today.
We also get the UK industrial production for July. IP is expected to have slowed in monthly terms, but to have accelerated on a YoY basis, as the expected monthly print is still higher than the one dropping out of the calculation.
We have two speakers on the agenda: RBA Governor Philip Lowe and Philadelphia Fed President Patrick Harker.
- Support: 1.2000 (S1), 1.1950 (S2), 1.1880 (S3)
- Resistance: 1.2100 (R1), 1.2170 (R2), 1.2250 (R3)
- Support: 1.2000 (S1),1.1920 (S2), 1.1800 (S3)
- Resistance: 1.2120 (R1), 1.2260 (R2), 1.2335 (R3)