Daily Analysis | 24 November 2017
Yesterday, the ECB released the minutes from its October policy gathering, where the Bank announced a reduction in the pace of its future QE purchases but did not set a clear roadmap for ending QE completely. The minutes showed that a “few” members preferred to set a clear end-date instead of leaving QE open-ended. These members were most likely Weidmann, Galhau, and Coeure, as all of them indicated their support for such action after the meeting. Moreover, some policymakers argued the Bank should stop signaling that asset purchases will continue until there is a sustained improvement in the path for inflation, instead opting for some flexibility on the subject. Although there did not appear to be much support for such an action, the fact that this discussion took place maybe a hint of how the Bank could adjust its forward guidance in the future.
Meanwhile, Eurozone’s preliminary PMI for November all rose by much more than expected, signaling that the bloc’s economy picked up, even more, speed towards the end of the year. Should the Eurozone continue to perform at a robust pace, this could add credibility to the argument of Weidmann and others to set an end-date to QE and thereby, generate speculation for a complete tapering of ECB purchases, perhaps as early as year-end 2018. As for the euro, even though the currency’s longer-term direction may be decided by the evolution of ECB policy, in the more immediate term, I believe that politics could overshadow economics once again. Specifically, the euro’s short-term bias may be dictated primarily by developments on the German political front. A confirmation that the country will head to early elections could heighten political uncertainty even further and thereby, weigh on the common currency.
EUR/JPY rebounded on Thursday from near the 131.40 (S2) support territory and during the Asian day Friday, it broke above the resistance (now turned into support) barrier of 131.90 (S1). The price structure on the 4-hour chart suggests that the short-term outlook is sideways, with the rate oscillating between the support level of 131.40 (S2) and the resistance territory of 134.40 since the 15th of September. That said, considering that the latest rebound started from the lower bound of this range, I see the prospect for further upside extensions, perhaps towards the upper bound. As such, I would expect the bulls to remain in charge and aim for a test of the 132.40 (R1) hurdle soon, where a clear break could pave the way for the 132.70 (R2) zone.
Oil prices surged yesterday, extending their recent gains, with no clear fundamental catalyst behind the move. Market chatter and reports have attributed the surge to the Keystone pipeline now delivering much less crude supply to the US from Canada, but I am hesitant to trust that view, considering that this story is not new and has likely been priced into oil already. Moving forth, the upcoming OPEC meeting will likely dominate headlines and dictate the forthcoming direction of the precious liquid in the near-term. With market participants generally anticipating a 9-month extension of the current deal, the key question facing traders is whether we will see speculation for something more than this ahead of the meeting, such as a 12-month extension or deeper production cuts.
Looking further ahead, even though oil prices could remain supported on OPEC comments and actions over the next weeks, I remain skeptical with regards to a healthy long-term uptrend in oil from current levels. If WTI prices are sustained above the USD 60 mark, this would likely attract US shale producers to increase their production drastically as their profit margins recover, something that could keep a lid on future price gains.
WTI spiked higher on Thursday after it found support near the 57.80 (S1) zone. During the European morning Friday, the price looks to be headed for a test of the 58.70 (R1) level, marked by the lows of June 2015. Given that the latest surge in prices signaled a forthcoming higher high on both the 4-hour and the daily charts, the short-term picture appears to be positive. Thus, if the bulls manage to overcome the 58.70 (R1) level soon, I would expect them to aim for a test of the psychological 60.00 (R2) territory.
During the European morning, we get the German Ifo survey for November. The current assessment index is forecast to rise marginally, while the expectations index is anticipated to tick down. That said, both the Markit manufacturing and services PMI for the month rose by much more than expected, signaling accelerating economic growth in Germany. Given that both the Ifo and the Markit surveys monitor the sentiment of businesses, there is the prospect for an upside surprise in the Ifo prints as well, something that could prove somewhat positive for the euro.
We have three ECB speakers on the agenda: Vice President Vitor Constancio, Governing Council member Francois Villeroy de Galhau, as well as Executive Board member Benoit Coeure.
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