Daily analysis | 07 September 2017
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Today, investors will be sitting on the edge of their seats in anticipation of the ECB policy gathering. Given that no change in rates is expected, the market focus may be on whether the Bank will remove from its statement the easing bias that QE can be expanded both in terms of size and/or duration if needed. However, last week, reports citing sources familiar with ECB discussion, poured cold water on any removal expectations.
In our view, this suggests that in case the Bank maintains its QE easing bias, the market may react little, as it has already responded to the aforementioned reports. EUR/USD could tumble, but not much. It could test once again the key support barrier of 1.1830 (S1) or the medium-term uptrend line taken from the low of the 17th of April. The surprise would be a removal of that easing bias. This could cause EUR/USD to surge above the 1.2000 (R2) figure, and even break above 1.2100 (R3).
Another key point of interest may be any comments regarding the rapid pace of the euro’s appreciation. However, even if the Bank seizes the opportunity to express some further worries about the euro’s strength, we expect something like that to only trigger a correction. As long as Draghi continues to remind us that financial conditions remain accommodative, we don’t expect a reversal in the common currency’s uptrend. The risk to that view is any signals that financial conditions, in general, have started to tighten due to that.
The BoC did it again
Yesterday, the Canadian dollar skyrocketed after, in a surprise move for many market participants, the BoC decided to increase interest rates for the 2nd gathering in a row. The tone of the statement accompanying the decision remained on the hawkish side, with officials noting that recent economic data have been stronger than expected, confirming their view that growth is becoming more broadly-based and self-sustaining. On the inflation front, the Bank acknowledged that price pressures have evolved largely as expected in July and that the latest increase is consistent with the dissipating negative impact of temporary price shocks and the absorption of economic slack.
As for future monetary policy decision, the Bank said that they will be guided by incoming economic data and financial developments as they inform the outlook for inflation. As such, investors are likely to pay extra attention to upcoming economic data in order to assess the probability of another rate hike this year. Specifically, the employment data tomorrow and the CPI’s on the 22nd of September may be proven critical on that front. At the time of writing, the probability for another rate increase by year-end is around 55%. That probability could rise further if data continue to suggest that the economy continues to perform in line or better than the Bank anticipates.
USD/CAD collapsed yesterday, following BoC’s unexpected decision to lift rates. The pair broke two support levels in a row and stopped fractionally above the 1.2120 (S1) barrier, a support marked by the low of the 18th of June 2015. Then the rate rebounded and currently, it is trading slightly below the 1.2260 (R1) resistance. The BoC collapse confirmed a forthcoming lower low on both the 4-hour and daily charts and thus, we believe that the outlook remains negative. If the bears manage to take advantage of the rebound near 1.2260 (R1), we would expect them to pull the trigger for another test near the 1.2120 (S1), the break of which could open the way for the psychological zone of 1.2000 (S2).
As for the rest of today’s events:
A few hours ahead of the ECB, the Riksbank will announce its own interest rate decision. The upbeat inflation data, and the stronger than expected economic growth for Q2, make us believe that the Bank could proceed with removing its interest rate bias at this policy gathering. What could make the Riksbank hesitant to remove its easing bias, is the strengthening SEK.
As for the economic data, we get Eurozone’s final GDP print for Q2. Given that it is coming in a couple of hours ahead of the ECB meeting, we expect it to pass unnoticed. In the US, we have initial jobless claims for the week ended on the September 1st, while in Canada, building permits for July and the Ivey PMI for August are due out.
Besides President Draghi, who will hold a press conference following the ECB decision, we have two more speakers on the agenda: Cleveland Fed President Loretta Mester and New York Fed President William Dudley. Following the latest dovish remarks from Brainard, Kashkari, and Kaplan, it would be interesting to hear their view.
- Support: 1.1880 (S1), 1.1830 (S2), 1.1730 (S3)
- Resistance: 1.1950 (R1), 1.2000 (R2), 1.2100 (R3)
- Support: 1.2120 (S1),1.2000 (S2), 1.1920 (S3)
- Resistance: 1.2260 (R1), 1.2335 (R2), 1.2430 (R3)