It's all about the Euro today with investors keen to find out what is Mario Draghi prepared do to support growth in the Euro area. The Single currency is trading around the 1.31 mark this morning and depending on what the ECB presents today and Mario Draghi's remarks during his press conference we will likely see quite a volatile session for the Euro. The Dollar was largely unchanged after the ADP release, which means that investors are looking towards the NFPs for clarity before they commit to a direction, with Dollar/Yen unable to break above 112. Gold and Oil consolidated, equities were slightly below water.
The ECB monetary policy meeting today is one of the two key events of the week, with the other being tomorrow's NFPs. However, the ECB event today may have a more pronounced and long-lasting effect on the market and here's why. We've seen growth in the Eurozone slow down in recent months, on the back of political challenges, domestically and abroad, and rising geopolitical risks that prevent producers and consumers from committing to investments and production. As such, the ECB has been supporting liquidity in the Euro area by providing banks with loans in order for them to in turn increase lending to everyday people and keep the economy going. These central bank loans are called TLTROs.
These loans are about to expire in June but given the lower growth prospects seen in the Euro area, the ECB is seriously considering to announce a new round of TLTROs to keep the domestic economy supported. And here lies the key takeaway from today's meeting: if the ECB announces the new round of loans today the Euro will dive towards the 1.1220 lows as increased money supply in the market will drive prices lower. If the ECB mentions that they will introduce a new round of TLTROs but defer offering any details right now, we still expect a bearish reaction towards 1.1240 but not a sell-off as the markets have largely priced in a bearish ECB. In the off chance that Draghi says nothing though, the Euro will soar towards 1.14 as expectations for a bearish meeting will be proven wrong.
The Dollar saw little reaction to the ADP employment figures yesterday and Dollar/Yen failed to break the deadlock. Currently, prices are trading within a very narrow range just below 112 and as we discussed yesterday, the NFPs may be the catalyst needed to provide some direction. We will discuss expectations and scenarios in regards to the report and the price action that will follow in our note tomorrow morning as we expect little to come in the next 24 hours.
Gold seems to be in the same state with Dollar/Yen, consolidating for the time being and waiting for a fresh driver to provide direction. Prices have found a temporary equilibrium just below the $1,290 level and we may see a further correction towards the $1,280 area too but the main action will come on the back of the NFPs. A positive reading will push the Dollar higher and will put the $1,280 support to the test, while a softer round of figures will allow Gold to recover towards $1,295. Oil sees a similar consolidation and we will wait to see which side of this sideways pattern will be broken; to the upside, the next area of interest lies around $60 and $62 while a move lower will expose the $54 and $52 areas.
Equities are in need of a fresh catalyst right now as the news about the US and China coming closer to a trade deal hasn't been enough to prompt new buying action. With market participants focused on the ECB today, stock traders will likely be anxious about tomorrow's NFPs. However, if the ECB goes ahead and discusses a new round of TLTROs, the mere fact that monetary tightening is off the table from yet another central bank - with the Fed on pause for now - should be positive. Futures however point slightly lower, again indicating that traders need something concrete before they jump on board.
MARKET EVENTS TO WATCH
- Eurozone Gross Domestic Product - 2pm
- European Central Bank Rate Decision - 4.45pm
- ECB's Draghi Speaks in Frankfurt After Policy Decision - 5.30pm
All times are GMT +4.