Thursday, September 13, 2018

Majors to take their cue from the two central bank meetings today, US CPI on the docket as well

Tags
  • Dollar
  • Euro
  • Pound
  • Stocks
  • European Central Bank
  • Bank of England

MORNING BRIEFING

Investors' attention will squarely be on the two central bank meetings today with the ECB and the BoE announcing their interest rate decisions. Both central banks are guaranteed not to change their interest rate policies today but their forward guidance will play a key role in how the Euro and the Pound will trade going forward. At the same time, equities had a mostly positive day yesterday but this morning futures in Europe and the US are indicating a muted opening bell.

Starting with the Euro and the ECB rate decision, it is clear that Mario Draghi will not raise rates today - why would he? - and it's almost certain that he will not deviate from his steady but cautious tone. Growth in the Euro area over the past few weeks has somewhat slowed down while inflationary pressures still remain subdued so Draghi will likely strike a conservative tone which will not alter market expectations for the first rate increase to come late next year. Given the lack of any positive catalysts to provide upwards momentum it's likely that the Euro will trade lower today with the 1.1580 area appearing as the first target and the 1.1530 lows as the next area of interest, barring any surprises from the US CPI reading later in the afternoon.

The Pound on the other hand looks poised for more gains on the back of the positive Brexit headlines indicating progress in the negotiations while the domestic economy has been fairing relatively well. Retail sales, inflation and wage growth have ticked higher and, even though manufacturing and service productivity has retreated, it's clear that Brexit is the key driver here. As such, any signs of positivity in the accompanying statement following the rate decision - as there will be not press conference this time around - should prompt traders to buy Sterling and drive prices towards the 1.32 barrier.

The Dollar will also be at the forefront of attention today with the release of the US Consumer Price Index bound to take a toll on the greenback and the rest of the majors. Yesterday, the Producer's Price Index data surprised to the downside after oil prices stabilized and this might be a precursor of a lower CPI reading as well. Should this be the case, Dollar/Yen may break below 111 while any bearish bias in the Euro from a cautious ECB may be offset by Dollar's weakness.

In the emerging markets' space, the Turkish central bank will be meeting today in an effort to support the collapsing Lira. Analysts expect the CBT to raise the 1-week repo rate by between 325 to 450 basis points in an attempt to arrest the overheated inflation in the country. Inflation reached 17.9% last month and the central bank wants to limit money supply by raising the repo rates to help the domestic currency recover but it will be interesting to see how the Lira will react: prices remain around their recent 6.8 lows with the Dollar/Lira cross trading at 6.37 this morning. For any meaningful reaction, the Lira needs to at least hit the 6.0 figure which seems hard to be achieved at this point.

Gold posted strong gains during yesterday's session - the biggest increase in two weeks - to hit $1,205 on the back of lower US producer prices that saw the US Dollar decline. The producer prices' surprise might be an early indication that today's Consumer Price Index would print weaker than expected and this may prompt further weakness in the greenback and send Gold higher with $1,215 the next level to focus. At the same time, Oil hit $71 per barrel as we suggested yesterday but pulled back from its highs to end the day $1 lower. A recent survey highlighted that large Asian consumers are turning away from Iranian oil while Chinese purchases are set to rise, both catalysts that may see prices climbing further towards the $72.50 area.

Equities ended the day in the green yesterday across the globe with markets in Europe and the US gaining between a quarter and half a percent. No news is good news in the case of Trump's trade war front and equity traders are taking advantage of this break to re-establish their long positions. At the same time, US Treasury Secretary Mnuchin approached China to propose a fresh round of negotiations in an attempt to alleviate frictions; a sign that should be well received by equity traders. This morning though, equity futures on both sides of the pond are indicating a marginally bearish opening bell but we believe that it's more likely that yesterday's positive bias will spill over into today's session.

MARKET EVENTS TO WATCH

  • Bank of England Rate Decision - 3pm
  • European Central Bank Rate Decision - 3.45pm
  • US Consumer Price Index - 4.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Market Research

 
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