ECB to tighten policy remains the main theme for second half of 2017. Should you long EUR/USD?
Investors will still pay attention to Draghi’s words in Jackson Hole despite no fresh policy to be expected
Federal Reserve’s annual symposium in Jackson Hole, Wyoming, every August has become a staging ground in the past decade for central bankers to unveil and explain complicated new policies in a financial crisis era. Fed is usually in the spotlight, but for this round, focus is on ECB’s Mario Draghi. The meeting is scheduled on 25th August, this Friday.
ECB’s Mario Draghi is not expected to deliver any new policy message at Jackson Hole conference. However, this reason alone may not be sufficient to stop investors from stocking up on euro.
News reported last week in major financial media that while the speech was initially seen as an ideal slot for a major address, but Draghi told rate setters at the last policy meeting he would honour the Governing Council's decision to hold off the discussion until autumn. Having said that, the schedule of the announcement is just delayed a few weeks and that alone does not justify selling euro.
At a similar conference in Sintra, Portugal, the result is very different from what ECB has hoped for. It sent markets on a rollercoaster and instilled an added sense of caution at ECB. That could be the main reason why Draghi may have decided to skip the Jackson Hole opportunity to avoid creating unnecessary volatility. Euro zone economy has grown in 17 straight quarters and employment is rising faster than expected. The current slowing inflation is not a strong reason to keep policy at ultra-accommodative level forever.
All in all, ECB is laying the groundwork to reduce the stimulus in 2018. Spoken in July, Draghi said ECB’s governing council would decide what to do with its bond-buying program in “fall,” referring to its meetings in 7th September and 26th October.
US launching “Section 301” investigation on China could have negative impact on the Aussie
US has launched its measure against Chinese trade policies. They initiated an investigation to determine if its largest trading partner has been engaging in unfair practices, a move that could potentially trigger an economic war.
On Friday, US Trade Representative announced the initiation of a “Section 301” investigation to determine whether China’s intellectual property policies and practices are “unreasonable or discriminatory, and burden or restrict US commerce”. Trump administration estimated intellectual property theft in China could cost US as much as $600 billion a year.
Section 301 of the Trade Act of 1974 has not been extensively used since 1980s. The law allows US president to impose trade sanctions, tariffs, or other trade restrictions in order to protect American industry without approval from WTO.
We do not expect the investigation to escalate further. Most likely, it will be settled through various negotiations. But for near term, jitters may spread into Aussie, who is the most relevant to China’s trade.
Our Picks
EUR/AUD – Slightly bullish. Traders continue to accumulate euro long positions and US investigating China trade deals could bring this pair towards 1.4950.
USD/JPY – Slightly bullish. This pair may rise towards 110.95 ahead of Jackson Hole meeting as the price is near key support level.
XAU/USD (Gold) – Slightly bullish. The uptrend seems intact. Gold may rise towards 1295.
Top News This Week (GMT+8 time zone)
Global: Jackson Hole Symposium, Friday 25th August.
Market will pay high attention to speeches of Draghi and Yellen.
UK: Second estimate GDP q/q, Thursday 24th August, 4.30pm.
We expect the figure to come at 0.3% (previous at 0.3%).