Tuesday, December 10, 2019

Stocks decline as trade deadline approaches; will Lagarde make her stance on monetary policy?

  • China
  • Dollar
  • Gold
  • Euro
  • European Central Bank


Market recap: Investors cautious of the economic week ahead

Stocks in the US fell on Monday as investors stays cautious ahead of the Fed monetary policy meeting on Thursday and the US tariff deadline on December 15th. The DJIA fell 0.38%, S&P500 retreated 0.32% and the Nasdaq lost 0.4%.

Meanwhile safe haven assets were relatively flat on Monday as gold inched 0.05% higher while the Dollar Yen was mostly flat.

Brent crude futures fell and ended Monday 0.33% lower as China's exports surprised investors by declining for the fourth straight month weighing on oil prices. The drop in exports was mostly due to a sharp decline in exports to the US, reflecting the impact of the US-China trade war has on the Chinese economy.

In Asia, major indices were mixed on Tuesday morning. The Nikkei and the Hang Seng Index started trading 0.25% and 0.44% lower while the Straits Times Index started the day 0.09% higher. But the Straits Times Index fell later in the morning and was 0.15% lower as of 9.33am (GMT +8).

Today's Analysis: All eyes on Lagarde's speech, not ECB’s monetary policy decision

The European Central Bank (ECB) is set to announce its decision on monetary policy on Thursday, at 8.45pm (GMT +8). But the focus of the day will be on ECB President Christine Lagarde instead as she speaks on monetary policy in the press conference following her first monetary policy meeting as ECB President.

The ECB is unlikely to ease monetary policy any further, after the aggressive easing carried out in September's monetary policy meeting and as economic data in the Eurozone has been generally mixed. The ECB cut its deposit rates by 10bps and restarted quantitative easing at a monthly pace of 20bn euros starting in November at its September meeting. Eurozone Manufacturing and Services Purchasing Managers' Index (PMI) beat expectations for November; Core inflation rose more than expected; Q3 GDP grew year-on-year and unemployment remained constant in October. Germany also narrowly missed a technical recession in Q3, beating economists' forecasts.

Eurozone economic data still poor, but looks to be recovering slightly


This means that while the ECB is unlikely to make changes to interest rates or quantitative easing, investors will be looking at signals on monetary policy for the next year. But Lagarde is likely to focus on the upcoming review for the ECB's monetary policy framework instead of her stance on monetary policy itself. Lagarde has also made it clear that she would like the ECB to explore issues such as climate change and inequality. But if the ECB signals that it is starting to move into those areas before the Eurozone economy picks up, investors will likely react negatively.

If Lagarde still does not make her stance on future monetary policy clear, but signals at a possible adjustment in inflation rate targets to a range instead of the current 2% target, then the euro is likely to rise as a result, pushing EUR/USD towards 1.1075. But if she continues to reiterate herself on the monetary policy framework review without signalling her stance on future monetary policy or details for the review, EUR/USD will likely remain little changed, ranging between 1.1055 and 1.1075. In the event that the ECB or Lagarde gives dovish signals for monetary policy in 2020, then expect the euro to fall, putting downward pressure on EUR/USD to fall to 1.1055 and possible break 1.1055’s level.


Technical Analysis:         


Bears and bulls continue to fight for possession of the EUR/USD currency pair ahead of the Fed and ECB monetary policy meeting this week. The bulls will likely try to regain momentum after the bears recent downward pressure. If the ECB's or the Fed's monetary policy is in bulls’ favour, expect EUR/USD to break past 1.1075's level to range between 1.1075 and 1.1088. But this week's general elections in the UK are also likely to put downward pressure if Conservatives regain their majority in the UK's parliament. In that case, the bears will likely break the 1.1055 support and EUR/USD will likely fall towards 1.1029.

Support: 1.1055 / 1.1029 / 1.0992

Resistance: 1.1075 / 1.1088 / 1.1107

EUR/USD Chart (H4)