If the ECB deliver a rate cut with increase and extension in QE with clear room for further action next year, this will weigh heavily on EUR. The BOJ are not expected to enact further easing this year, a dynamic which should lead EUR/JPY lower into year end.
Sell EUR/JPY
- The break below the key 134 area base in EUR/JPY paves the way for a retest of the long term bullish trend line around 128 as first target and the 2015 lows just below.
If the ECB, for whatever reason, fails to impress markets on Thursday then the ensuing investor skepticism is likely to see sharp profit taking on Thursday. A short squeeze in EUR/USD presents a great opportunity to re-enter at better levels ahead of the December FOMC where the Fed are set to raise rates, which will likely see EUR/USD sharply lower at least in the short term.
Sell rallies in EUR/USD
- The euro’s descent back down to 2015 lows has run out of momentum ahead of the ECB meeting, with players awaiting a clear directional cue. A short squeeze back up into a retest of the broken 1.08 area lows, and above it the broken bullish trend line, should cap the upside in EUR/USD and as such look to sell into this area, targeting a retest of 2015 lows by year end.
9.50 (GMT ) What’s happened since the last meeting?
Following the sharp sell off in initial response to the October ECB meeting, EUR/USD has since fallen another 500 pips lower as investor expectations have continued to mount in anticipation of further easing measures at Thursday’s meeting. Data since the last meeting has been mixed, though notably hasn’t materially weakened and indeed some areas have improved.
- EuroZone October manufacturing and services PMI data both beat expectations
- EuroZone unemployment declined to 10.8% from 10.9% previous.
- EuroZone CPI improved to 0.1% from 0.% YoY in October, though MoM the 0.1% reading represented a decline from the previous 0.2% reading.
- EuroZone Industrial Production contracted less than expected MoM at -0.3% vs -0.4% expected.and beat expectations YoY
- EuroZone 3Q GDP undershot expectations at 0.3% vs 0.4% expected.
- EuroZone ZEW economic sentiment fell sharply below expectations to print 28.3 vs 35.2 expected.
Alongside the data flow since the last meeting, we have also had various comments on the wires from ECB members, most notably ECB chief Draghi who reiterated the seriousness of the threat to EuroZone inflation noting that “downside risks stemming from global growth and trade are clearly visible” and that “signs of a sustained turnaround in core inflation have somewhat weakened.” Draghi also commented on the ECB’s willingness to do “whatever necessary” in order to “raise inflation quickly.”
The minutes release of the October meeting also cast a further Dovish shadow revealing that the ECB was actually considering a potential increase in QE as early as October but it was decided that waiting until the December meeting would avoid any premature actions on a possibly unduly gloomy outlook
9.30 (GMT) What happened at the last meeting?
The ECB’s October meeting delivered a heavy Dovish blow to the euro as Mario Draghi and the governing council addressed the key weaknesses and threats jeopardizing the path to the ECB’s inflation target. Draghi cited the need for “thorough analysis” of the “strength and persistence of factors” weighing on inflation, among these the persistent weakness in emerging markets (particularly China) which is weighing on foreign demand and exports.
Further recorded threats to the inflation outlook were cited as the possibility of further price declines in oil markets, though this was not included in the ECB’s “technical assumptions,” alongside the appreciation of the nominal effective exchange rate over the past several months (pre October). Draghi stated that “the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting” and in the press conference which followed, markets were shocked to learn that the ECB was considering the potential not only for further QE but also for further reduction in interest rates.
Market reaction to the October ECB meeting saw EUR/USD down just shy of 300 pips by midnight October 21st.
9.10 (GMT) Welcome to our day’s rolling coverage
Hello and welcome to our live coverage of today’s ECB Meeting. Here are the key details for the day:
- European Central Bank December Meeting,
- Thursday December 3rd, 1245GMT
- Current rate 0.05%, expected unchanged