Thursday, October 24, 2019

EU officials delay decision on Brexit extension; will Draghi’s final monetary policy meeting be eventful?

  • Dollar
  • Gold
  • Euro
  • Pound
  • Stocks

Market recap: Market focus continues to be on corporate earnings

US equities advanced slightly on Wednesday, despite mixed earnings reports from corporates. Boeing’s data fell short of analysts’ expectations, but its stock increased 1.04% as the company surprised investors by claiming it expects its grounded 737 Max aircrafts to return to service before 2020. The DJIA rose 0.17%, the S&P 500 increased 0.28% and the Nasdaq gained 0.19%.

Meanwhile, safe haven assets ended the day mixed. Gold rose 0.30% while the yen dropped 0.18% against the dollar. The Dollar Index fell slightly, losing 0.04%.

Sterling recovered on Wednesday, rising 0.31% (following a decrease of 0.68% on Wednesday), after EU officials delayed a decision on whether to grant the UK an extension to the Brexit deadline. British Prime Minister Boris Johnson said if the deadline is moved to January, he will call a general election in the UK.

In Asia, major indices surged on Thursday morning, with the Nikkei, Hang Seng Index and Straits Times Index spiking 0.78%, 0.31% and 0.38% when markets opened.

Tesla released its earnings report after US markets closed, beating analysts’ estimates of a loss of US$0.24/share, and reporting earnings of US$1.86/share for Q3. Tesla shares rose to as high as US$405 from US$254.68 in after-hours trading.
Earnings reports from 3M, Amazon, Visa and Twitter will be released next.

Today’s focus will be on US Durable Goods Orders report for September and the European Central Bank’s (ECB) decision on monetary policy.

Today’s analysis: Will the ECB change its monetary policy for October?

The ECB’s monetary policy meeting takes place today, October 24th, at 3.45pm (GMT +4). This will be ECB President Mario Draghi’s last meeting before successor Christine Lagarde takes his place on November 1st. During the last monetary policy meeting in September, the ECB cut its deposit facility rates by 10bps to -0.50% and reintroduced its Asset Purchase Programme (APP) for quantitative easing of 20bn euros a month starting November 1st. Draghi said the APP will continue as long as necessary until just before the ECB hikes interest rates.

But the minutes of the September meeting highlighted the divide between the ECB’s Governing Council members regarding the decision to restart the central bank’s APP, with some arguing that the resumption of bond purchases are excessive. Markets expect Lagarde to appear more hawkish on monetary policy than Draghi, preferring a fiscal policy since monetary policy appears to have reach the limit of how much it can stimulate the European economy, and is starting to show diminishing returns. Lagarde will also face the challenge of gaining Germany’s support, as the country’s central bankers have been vocal over their discontent towards Draghi’s aggressive monetary policy.

Futures tracking ECB interest rate changes indicate a 74% probability of no change in rates from the October meeting, and a 26% probability of a rate cut. Since the ECB has just cut rates in the previous month and the APP has yet to come into effect until November 1st, cutting rates or introducing additional quantitative easing at today’s meeting is highly unlikely.

EU economic data shows signs of slowdown

The ECB will likely set the tone for the next meeting in November. Members are tipped to highlight a weak economic outlook, with greater risks resulting from the World Trade Organisation’s (WTO) decision to award the US rights to place tariffs on US$7.5bn-worth of goods (the US has already increased tariffs on selected goods since October 18th), along with ramifications from the ongoing US-China trade war.

The euro is expected to remain little changed after the decision, with EUR/USD ranging between 1.111 to 1.115 as the market has already priced in a high probability of no changes in monetary policy. If the ECB appears more hawkish, you can expect the euro to strengthen against the greenback, possibly breaking 1.115’s level to rise towards 1.118’s level. But if the ECB places more emphasis on a weak economic outlook, then expect the dollar to weaken to 1.107’s level.

Will EUR/USD bulls be able to break the 1.115 resistance today? (H4)

EUR/USD is on an upward trend, as the dollar weakens thanks to reduced geopolitical risk, while the euro strengthens as the market expects a more hawkish ECB when Lagarde takes the helm. The bulls will try to retest the 1.115 resistance level and will likely break it if ECB members or Lagarde do appear hawkish. Expect EUR/USD to range from 1.111 to 1.115 levels, as the ECB is unlikely to change its current monetary policy.