Thursday, July 26, 2018

Will Draghi reveal a little bit more on when the ECB plans to raise interest rates?

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

MORNING BRIEFING

For yet another day the Euro is at the top of our watchlist and the key event today is the ECB meeting on monetary policy and Mario Draghi's press conference that will follow. The Euro traded higher during the US session yesterday as the outcome of the Trump-Juncker meeting was an amicable agreement not to impose fresh tariffs on each other while negotiating a fair trade relationship. The Dollar was lower for the day on the back of this news while equities moved higher on the positive tone coming out of the meeting.

Euro's price action today will depend on Mario Draghi's remarks after the ECB will leave interest rates unchanged for the time being. Investors' focus is on whether the head of the central bank will provide a little bit more clarity on when they intend to raise interest rates for the first time next year. At this time, the best indication we have is that the ECB wants to start tightening after the summer of 2019 but a hint on a more precise date would help longer-term investors position themselves.

In the short term though, the shared currency's direction will also take its cue from ECB's planned schedule. We believe that the base scenario is that Draghi will reaffirm his intention to end asset purchases in December this year and he should sound upbeat while sticking to the same “after the summer of 2019” sentence, which should be received in a positive manner from investors. The Euro traded to 1.1750 overnight and a hawkish Draghi press conference could drive prices to 1.18, but for this to materialize we need a clear break of yesterday's highs.

At the same time, the Dollar moved lower yesterday as Trump didn't reiterate his protectionist views when meeting with EC President Juncker. On the contrary, the meeting ended with a promise not to impose new levies; a development that helped the Euro, the Pound and the commodity currencies higher. The rest of the week will be important for the Australian and New Zealand Dollars now that they have broken above key resistances: 0.7480 is the target for the Aussie while the Kiwi could go all the way to 0.69.

Gold is also trading near a possible inflection point having reached the $1,235 level overnight, a clear break above this short-term resistance would conclude the previous medium-term downtrend and clear the path for a move towards the $1,245 level. Oil is on a similar trajectory this morning, having traded above $69 and looking poised to overtake the $70 level. Our base scenario suggests that Oil prices could rally all the way to the $78 area as tensions between the US and Iran continue to escalate.

Finally, equities had a negative day in Europe yesterday as investors were on the defensive ahead of the Trump-Juncker meeting but the US session was clearly a good one as traders jumped into the fray again when the positive outcome of the meeting hit the wires. This morning, the Asian markets are trading slightly below water but the European and US futures point towards a positive opening bell as equity traders are digesting the upbeat news from Washington. On the earnings' season schedule, heavyweights Amazon and Intel are expected to release their results today and our focus is on Jeff Bezos' company that, based on our analysis, is poised to hit new highs.

MARKET EVENTS TO WATCH

  • European Central Bank Rate Decision - 3.45pm
  • ECB President Draghi Holds Press Conference in Frankfurt - 4.30pm
  • U.S. Durable Goods Orders - 4.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Market Research

 
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