European stocks opened flat. The FTSE showed signs of exhaustion following a four-day rally.
The pound retraced losses against the US dollar and the euro, as the UK’s trade deficit shrank to £9.7 billion in October, from £12.7 billion printed a month earlier. However, Brexit chatter is keeping appetite in the pound limited. From a technical perspective, the golden cross formation on the GBP/USD hourly chart suggests a further extension of losses towards 1.2505 (four-day descending change bottom) before the weekly closing bell.
US stocks extended gains to fresh historical highs. The relative strength index hints at deepening overbought conditions in US stock markets, which could potentially dent the appetite in fresh long positions and suggest that the time for a correction could be approaching.
The S&P 500 is expected to open flat at $2246, as the Dow is seen 15 points higher at $19630 at the US open.
ECB cut monthly purchases, yet expanded the QE duration
The European Central Bank (ECB) announced to decrease its monthly asset purchases from 80 to 60 billion euros beyond March 2017, yet for at least another nine months versus the consensus of six months.
Hawkish in quantity, dovish in duration, the ECB has only tweaked its policy to buy some more time to maintain the monetary conditions sufficiently loose through a potentially turbulent first half of 2017, with German, French and perchance Italian elections on the calendar.
Despite a tighter short-term effect, the ECB’s policy twist may turn out to be significantly looser in terms. History posterior to sub-prime crisis proved a solid central bank tendency to expand the Quantitative Easing (QE), or to postpone QE tapering, as long as there are enough assets to buy in the market.
As a result, the divergence between the ECB and the Federal Reserve (Fed) policy outlook endorses a further depreciation in the euro against the US dollar.
The sustained recovery in the US yield curve is supportive of a slide below 1.0460 (March 2015 low).
The speed of the euro depreciation is contingent on the steepness of the Fed policy.