Forex News and Events
The European Central Bank gives policy verdict today and is expected to announce the much expected Quantitative Easing (sovereign bond purchases) in order to fight the deflation and help the union to step out of recession. The expectations are running high regarding the size and the content of the program. It seems there will be more room for disappointment out of today’s meeting, simply because the expectations have gotten well beyond the ECB’s objectives, partially thanks to Swiss National Bank’s surprise removal of the EUR/CHF floor on Thursday of last week.
The ECB’s balance sheet has been expanding since September 2014, since the ECB decided to gradually put in place two rounds of TLTRO lending and private debt purchases. The Bank’s balance sheet advanced to 2.2 trillion euros as of January 16th, meaning there is still an important potential for expansion given the policymaker’s desire to expand the total assets to roughly 3 trillion euros. The markets expect the ECB to announce a package worth 500 billion euros to, at least, meet the consensus. This number extends to 750 billion to 1 trillion euros as there is growing expectation that the National Central Banks (NCBs) will be involved in the bond purchases program. There is also talk of open-ended, monthly 50 billion euro purchases until the target balance sheet size is achieved (as Dow Jones reported yesterday). Finally, it is worth noting that we also hear rumors in favor of an operation exceeding the trillion euro. All in all, the expectations are very high and the ECB need to come aggressive enough to meet expectations. This is where we see risk of disappointment during the ECB President Draghi’s press conference following the verdict.
Frequently asked questions…
There are important uncertainties vis-à-vis the potential ECB QE today. The leading ones are clearly the size of the operation, whether the ECB action will be a one shot move or an open-ended program and whether the ECB will share risk with the NCBs - where the latter would buy only their own countries’ debt and carry the idiosyncratic country risk alongside with the ECB.
Another important unknown is the distribution of the purchases. The rational expectation is a distribution with respect to each member’s capital key (weighting of EZ members respective capital at the ECB). Yet other possible scenarios include the use of other metrics/factors, as bond ratings, percentage of debt-to-GDP ratio, etc. Should the QE involve only the AAA-rating and investment grade bonds – in which case the Germany will be the biggest beneficiary while being the last EZ country to need such help – or should the priority be given to those most in need?
Finally, the duration of the bonds. The purchases should involve longer-term maturities, mostly 5 to 10-year bonds, in order to lower the corporate borrowing costs and give time to cash to reach the real economy. A shorter duration operation can only end up in market dissatisfaction.
Expect higher volatilities as Draghi speaks today
All in all, the list of pending questions is non-exhaustive. The ECB President Draghi’s speech will likely trigger important price action in the EUR-complex. We stand ready for two-sided volatilities. EUR/USD rallied to 1.1679 yesterday amid Dow Jones reported that the ECB would propose 50 billion euro QE per month. News had no official confirmation yet triggered heavy price action, warning traders the high tension in the EUR market pre-ECB/ Draghi.
High EUR volatility on the wire
The Risk Today
Luc Luyet
EUR/USD EUR/USD has moved above the hourly resistance at 1.1649, but has failed to hold above it. Hourly resistances can now be found at 1.1679 (21/01/2015 high, see also the declining trendline) and 1.1747 (intraday high). An hourly support lies at 1.1546 (19/01/2015 low). Another support stands at 1.1460. In the longer term, the break of the strong support area between 1.2043 (24/07/2012 low) and 1.1877 (07/06/2010 low) confirms the underlying bearish trend. The long-term symmetrical triangle favours further significant weakness. Key supports can be found at 1.1000 (psychological support) and 1.0765 (03/09/2003 low), whereas a key resistance stands at 1.2252 (25/12/2014 high). The ECB meeting today is expected to put pressure on EUR/USD. We have removed our strategy.
GBP/USD GBP/USD continues to move within the horizontal range defined by the support at 1.5035 and the resistance at 1.5274. In the longer term, the technical structure is negative as long as prices remain below the key resistance at 1.5620 (31/12/2014 high). A full retracement of the 2013-2014 rise is expected. A psychological threshold lies at 1.5000, while a strong support stands at 1.4814 (09/07/2013 low).
USD/JPY USD/JPY has faded near the hourly resistance at 118.85 (13/01/2015 high), suggesting a pickup in selling pressures. However, as long as the hourly support at 116.93 (19/01/2015 low) holds, a further rise towards the top of the declining channel is favoured. A key resistance stands at 119.96 (see also the declining channel). Another support lies at 115.86 (16/01/2015 low). A long-term bullish bias is favoured as long as the key support 110.09 (01/10/2014 high) holds. Even if a medium-term consolidation is likely underway, there is no sign to suggest the end of the long-term bullish trend. A major resistance stands at 124.14 (22/06/2007 high). A key support can be found at 115.46 (17/11/2014 low).
USD/CHF USD/CHF is trying to find a new equilibrium after the SNB's announcement. The recent succession of lower highs after the top made at 0.8838 suggests increasing selling pressures. Hourly supports can now be found at 0.8453 and 0.8353. An hourly resistance now lies at 0.8773 (21/01/2015 high). Following the removal of the EUR/CHF floor, a major top has been formed at 1.0240. Given that the subsequent panic has not broken the strong support at 0.7071 (09/08/2011 low), this level should hold in the next months. A medium-term sideways move between the key support at 0.8353 and the key resistance at 0.9132 is favoured.
