Thursday, January 24, 2019

ECB's interest rate decision will shape the outlook for the Euro today

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks

MORNING BRIEFING

The Dollar gave up ground over the past 24 hours with most of its major counterparties gaining. The Euro and the Pound ended the day higher while the Yen erased earlier losses and picked up pace during the US hours. Equities were mixed with Europe closing in the red while the US markets were able to post small gains. Gold oscillated between $1,280 and $1,285 and Oil is trading just above the $52 mark.

The ECB monetary policy decision and Mario Draghi's press conference will be the main focus of the day. The European Central Bank will not make any changes to their interest rates' policy today but Draghi's remarks have the potential to shape the short-term outlook for the Euro. The Single currency traded close to 1.14 during yesterday's session on the back of Dollar's weakness but, unfortunately for the Euro bulls, today may be a different story. The recent weakness seen in the Eurozone cannot go unnoticed by the head of the ECB and his tone will make all the difference.

Draghi has no choice but to acknowledge the downtick in growth in the Euro area and he will definitely attribute this to the global trade tensions that take a toll on productivity, exports and business sentiment. However, the key will be whether he focuses on the recent sour data and hint that raising interest rates is not part of his plan any time soon or whether he regards this slowdown as transitory. In the former case, the Euro will suffer again and a retest of its recent lows should be almost immediate, with a possible extension towards the 1.1280 area. On the other hand, a less cautious tone from Draghi will help the Euro consolidate around current levels and have another go at the 1.15 mark.

The Dollar was on the defensive yesterday with losses against the European majors while Dollar/Yen seems to be losing steam as well. Growth concerns and the risk of an over-extended US shutdown are taking a toll on the US currency and even though Congress will vote today on two different proposals attempting to resolve the issue neither seems to muster the necessary support. As such, the US currency should continue trading with a bearish bias until we see the light at the end of the tunnel when the US government reopens.

Gold oscillated within a $5 range yesterday with no news or catalysts to trade on. For the time being, this consolidation should persist until we either see meaningful progress on the US-China trade talks, that should push the yellow metal lower, or fresh bearish US data that will drive prices higher as the Dollar would weaken. Oil is now in a similar mood to Gold, consolidating between $52 and $53; tomorrow is the big day for Oil in Davos so we should be prepared for increased volatility. The bias points higher and another retest of the $54 level seems likely.

Equities were mixed yesterday and investors remain on the sidelines as global and domestic risks dominate the headlines. We expect this lack of direction to persist today as the Asian markets are trading without a clear bias and the futures on either side of the Atlantic are trading almost flat.

MARKET EVENTS TO WATCH

  • Eurozone Manufacturing/Services PMI – 1pm
  • European Central Bank Rate Decision - 4.45pm
  • DOE U.S. Crude Oil Inventories - 8pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research