Wednesday, October 24, 2018

The spotlight falls on the Euro ahead of the ECB meeting tomorrow, PMIs on the docket

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

MORNING BRIEFING

It's all about the Euro today with fresh data pending for release from Germany and the Eurozone while the ECB meeting tomorrow is considered the event of the week. The shared currency spent the day hovering above the 1.1450 level yesterday and its short-term price action now depends on the PMI releases and Draghi's tone. At the same time, the risk off bias that sent Dollar/Yen crashing yesterday has been reversed overnight allowing the currency to recover while equity futures are also trending higher this morning.

The Euro will be front and center today in light of the fresh PMI data coming in from Germany, France and the Eurozone. Traders are eager to see how the manufacturing and services sectors fared last month in order to assess how bullish Mario Draghi will be tomorrow. Expectations are set for a slightly softer round of figures this time around and this may give a downbeat tone to the Euro. However, we believe that the true test for the currency will come tomorrow as market participants will want to hear what Draghi has to say about the recent performance of the Euro area.

If the head of the ECB reiterates his optimistic view of the economy and spends more time discussing his expectations for an uptick in inflation then the Euro will push higher with the 1.1550 level being the first target. Keep in mind that if inflation pushes higher - in line with Mario Draghi's comments earlier in the year - this will raise the odds of the ECB raising interest rates earlier than currently expected, and thus propel prices to the upside. However, if he instead focuses on the recent downtick in specific sectors - possibly in combination with a round of softer data today - then the Single currency will lose any support and decline towards the 1.1320 August lows.

The Dollar gained versus the Yen during the latter part of the day yesterday as risk sentiment improved after an extremely negative day for equities in Europe and the US. This seems as a counter-intuitive development as usually the Dollar/Yen and the US equities are positively correlated. As such, we need to take a step back and see whether this suggests a change in bias to the upside or only a temporary respite that will soon continue pushing prices lower. For Dollar/Yen the key level to keep an eye on is the 111.65 area and if we see a break to the downside then momentum will pick up and send the rate considerably lower.

Commodities followed different paths yesterday with Gold rallying close to $1,240 before settling $10 lower and Oil moving lower. The yellow metal reacted to the risk off tone seen earlier in the day and pushed to the upside testing its recent highs again; the first test seems to have failed for now but we may see another move higher soon as the fundamentals suggest that Gold's outlook points higher. Oil continued lower to hit $66 and even though the commodity seems oversold at this point we may see a deeper correction all the way to $64.50 over the next few days.

Equities in Asia are trading mixed while the rest of the global stock indices seem split at this stage. The European futures are pointing higher while their US counterparties point towards a bearish opening bell. This again suggests that the equities' selloff is considered more of a US story but this cannot play out for long as eventually the markets will synchronize. In the interim, the focus remains on the US earnings' season with online heavyweights Alphabet and Amazon ready to release their results during tomorrow's session.

MARKET EVENTS TO WATCH

  • Eurozone Manufacturing PMI - 12pm
  • Eurozone Services PMI - 12pm
  • Bank of Canada Rate Decision - 6pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research

 
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