The Euro comes front and center today ahead of the European Central Bank's meeting amid volatile market conditions. Mario Draghi will most likely end his QE program today but investors are keen to find out how bullish the head of the ECB will appear regarding the bank's forward guidance. The Pound recovers yesterday's losses as Theresa May survives the leadership challenge while Dollar comes off its highs following a steady but soft inflation printing. Gold remains unchanged while Oil retests the $51 area.
The European Central Bank's meeting on monetary policy will be the key event of the day today with market participants focused on Mario Draghi's rhetoric. The ECB will end their bond buying program that was initiated in an attempt to help the Eurozone recover from the financial crisis but what is more important is what lies ahead. Earlier in the year, investors speculated that the positive growth rate in the Euro area would prompt the ECB to start raising rates early in 2019 but the slowdown seen in recent months has cast serious doubts on whether this is still a credible scenario.
According to Draghi's official comments several times this year, the ECB plans to start hiking rates “after the summer of 2019”. However, these remarks were made during times of higher inflation expectations and part of today's announcements will most likely be a lower inflation and GDP forecast. Will this force Draghi to delay his plans for hiking rates next year or will he remain standfast and emphasize his optimistic outlook? The Euro's price action hinges on his tone and remarks and we see two scenarios: a positive message combined with lower forecasts, which will leave the Euro broadly unchanged or a more cautious tone that would raise concerns and will force the Single currency to 1.13 initially and potentially below that.
At the same time, Theresa May survived yet another battle yesterday after the leadership challenge resulted in the Tory party reaffirming its confidence to the British PM, albeit by a slim margin. So where does this leave us and the Pound? In our view, nothing changed: granted, May got a boost as she cannot be challenged again for another year but regarding the Brexit negotiations things still remain the same. The UK Parliament seems unwilling to pass her draft and the EU has made it clear that there's no room to renegotiate. Time is running out for May and actually that's her best card right now: the longer the MPs resist voting in favor of her draft the odds of a hard Brexit continue to mount, something they want to avoid at all costs. This is a high risk strategy for May but unfortunately it seems it's the only one left to use, which means that volatility and uncertainty will remain the dish of the day.
Commodities had little price action to show for over the past 24 hours with Gold hovering around $1,245 and Oil oscillating on either side of the $52 mark. Dollar's price action will decide Gold's next move: a break below $1,241 will clear the path towards the $1,234 and $1,230 support marks while for a serious rally towards $1,260 a break above $1,250 is needed. Oil has been trading sideways for the past few sessions as the market waits to see how OPEC's production cuts will affect supply; from a fundamental standpoint, Oil should start moving higher over the medium term.
Equities pushed higher yesterday across the globe. Risk sentiment continues to improve as US and China seem to be talking to each other while at the same time Italy's PM Giuseppe Conte said that they plan to reduce next year's deficit target to 2.04%. It's still very early to call victory on any front, especially China's trade spat with the US, but the short-term bias seems positive and equity investors are rejoining the fray. Futures in Europe and the US are pointing higher so we should see a continuation of yesterday's gains taking the global indices higher.
MARKET EVENTS TO WATCH
- European Central Bank Rate Decision – 4.45pm
- US Initial Jobless Claims – 5.30pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research