Thursday, October 25, 2018

Will Draghi make or break the Euro today?

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks
  • European Central Bank

MORNING BREFING

The Euro and the Pound had another negative day yesterday extending their bearish runs amid weaker Eurozone data and a risk-off backdrop. The Dollar pushed higher across the board with the exception of the Japanese Yen that is again in demand as investors respond to the risk aversion spreading in the markets. Gold moved higher as a response to the safe haven demand and equities plunged to new lows as corporate earnings seem to be peaking, hinting on an upcoming slowdown.

Fresh PMI data from Germany and the Eurozone forced the Euro to decline below 1.14 during yesterday's session and ahead of the ECB rate decision today. There's increasing evidence that the Euro area is going through a period of economic downtick while the higher inflation expectations are now put to the test. The key driver for the shared currency though will be Mario Draghi's response to this string of softer data: if the head of the ECB remains on a hawkish tone, staying true to his plan to end quantitative easing at the end of the year and start hiking interest rates around the 2019 summer then the Euro will receive a fresh round of demand as investors will attempt to buy the currency at a cheap price.

At 1.14, the Euro seems significantly devalued on a longer-term perspective and if expectations for a weaker Dollar towards the end of 2018 materialize then this may be an opportunity to get in low. On the other hand, if Draghi is forced to change his tune and instead focuses on the economic slowdown and hints on a potential extension of the QE program beyond the end of the year, the Euro will collapse. Support for the Single currency in case of a break to the downside is found around the 1.13 area.

In terms of the Dollar, the US currency is receiving inflows from almost all the higher beta currencies but the most interesting pair to focus on - especially during periods of risk aversion - is the Dollar/Yen. Prices have been consolidating between 112 and 113 for the past week after the significant decline seen earlier in the month. The main driver for the currency pair has been the risk-off bias witnessed in the equities' markets and after yesterday's collapse in the US another leg lower in the Dollar/Yen may be next. We're focusing our attention on the 111.65 support as a clear break below this key level will clear the path for a deeper decline towards the 110.50 and 110 levels.

Gold is again threatening to break above $1,240 amid a flight to safety triggered by the strong losses seen in the equities' markets. Safe haven demand is pushing prices to the upside and if the selloff in the stock markets continues then the yellow metal will push even higher with our first target found around the $1,250 level. Oil stayed above the $66 mark as momentum to the downside seems to be diminishing but the broader trend is pointing lower and we may see prices declining as low as the $64.50 level soon.

In the equities' universe, the US and European markets ended the day deep under water. The Dow Jones closed 2.4% lower while the S&P was 3% in the red as investors are growing increasingly concerned about corporate earnings, whether they have peaked and what this means for the domestic economy. This morning, futures in Europe are trending lower on the back of yesterday's bearish day but the US markets are trying to open in positive territory. Much will be decided by the way Alphabet, Twitter, Amazon and Snapchat's quarterly earnings will print today as another round of softer figures will increase the pressure on the US markets and force them even lower.

MARKET EVENTS TO WATCH

  • German IFO Expectations - 12pm
  • European Central Bank Rate Decision - 3.45pm
  • US Durable Goods Orders - 4.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research

 
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