Summary: The Euro slipped briefly below it’s one-week 1.10 support ahead of this week’s most important risk event. The ECB is widely expected to introduce further stimulus measures at its policy announcement today. Widespread weakening of the Eurozone economy amidst talk of a German recession saw the shared currency hit 2-year lows last week. At the New York close, the Euro changed hands at 1.1010, down 0.37% on the day. Elsewhere, a rebound in US Producer Prices in August lifted the Dollar Index to 98.627 from 98.377, up 0.31%. Sterling dipped to 1.2330 (1.2355) after Scottish courts ruled Boris Johnson’s suspension of the British Parliament unlawful. The Dollar extended its gains versus the Japanese Yen to 107.857, 6-week highs as the US 10-year bond yield edged higher. The Australian Dollar was littlechanged at 0.6865 (0.6863). China announced its first batch of tariff exemptions for 16 types of US goods ahead of a planned meeting with the US. In early Asia, President Trump responded in kind by delaying planned tariffs for two weeks, from 1 October to 15 October.
Global treasury yields stayed firm as bond traders prepared for today’s ECB meeting.
Wall Street stocks extended their gains as investors anticipate easier central bank monetary policies ahead of the ECB meeting. The Dow rose 0.94% to 27,152.00 while the S&P 500 rose to 3,002.00.
US August Core (excluding volatile food and energy) Producer Prices rose 0.3% from July’s -0.1%.
- EUR/USD – The Euro slipped to a fresh one-week and overnight low at 1.09852 before climbing back to settle at 1.1110 at the New York close. The shared currency is poised just above the 1.10 support and pivot level. While FX markets are expecting to add stimulus to the deteriorating Eurozone economy, not everyone sees an aggressive ease.
- USD/JPY – The Dollar climbed to 6-week highs at 107.857 as the US 10-year bond yield edged higher to 1.74% (1.73% yesterday). Bond markets have growing doubts that the ECB will be as dovish as once expected and yields have climbed way above their lows last week.
Risk appetite has also remained buoyant which is supportive of this currency pair.
- USD/DXY – the Dollar Index rallied 0.31% to 98.627 (98.377 yesterday) on the weaker Euro (which takes nearly 60% weight in the Index). The Greenback also finished firmer against most of it’s Rivals, boosted by the rebound in Core US Producer Prices.
On the Lookout: It’s all about the ECB today. All markets have big expectations for this risk-event because it is the first meeting since July. Mario Draghi introduced a series of measures intended to address specifically what has occurred to the region’s economy since then. In the past two months almost every part of the Eurozone’s economy deteriorated. Germany’s Bundesbank admitted that the country could fall into a recession in Q3. The Euro slumped to fresh two-year lows at 1.0926 on September 4.
Mario Draghi and his colleagues have a range of options available. They include an outright rate cut, forward guidance (keep rates low for longer), compensation for European banks to counter the effects of negative rates and restarting QE (asset buying). Most expect some combination of these options. The risk is for a disappointment which could see a big short squeeze.
US August Headline and Core CPI is also released at the same time (10.30 pm Sydney).
Other data releases today see Japanese Core Machinery Orders, Annual PPI, Tertiary Industry Activity. Euro area reports include German and French Final CPI (August) and Eurozone Industrial Production.
Trading Perspective: The Dollar’s broad-based gain was the result of firmer US yields. Global rates have climbed this week as bond traders cover their short Treasury positions. Expectations of a less dovish ECB have undermined Treasury prices, lifting yields.
Germany’s 10-year Bund closed at -0.57% against -0.71% (4 September). The US 10-year bond yield edged up to 1.74% from 1.46% 8 days ago. The yield curve between US 2-and 10-year rates have also widened with two-year yields slipping to 1.67%. Which supports the Greenback. Perhaps FX could learn something from bond traders.
The week’s major economic focus will be tonight’s US Consumer Price Inflation report, a more widely watched price gauge. Friday sees US Retail Sales.
- EUR/USD – The Euro is poised, holding just above its support and pivot level of 1.1000. Yesterday’s overnight high was 1.10556. The Euro dipped to 1.09852, overnight and one-week lows before rallying to finish at 1.1010 in New York. Traders are expecting the ECB deliver an outright rate cut (a minimum of 10 basis points). Anything less could see the shorts run for cover up to as high as 1.1200. A combination of measures, including a re-introduction of QE (asset-buying), EUR/USD could plunge below 2-year lows. Strong support should emerge at the 1.0800-50 level. Meantime immediate resistance lies at 1.1040 followed by 1.1080. Immediate support can be found at 1.0980 and 1.9030. Be prepared to trade extremes, keep your stops conservative. While the meeting is important, US data will also figure in the equation.
- USD/JPY – The market’s appetite for risk improved with China’s introduction of its first batch of tariff exemptions for US goods days ahead of a planned meeting with the US. Firmer US ten-year yields have also boosted USD/JPY. The Dollar traded to 107.857 overnight and 6-week highs before settling at 107.85 in New York, keeping its firm tone. USD/JPY has immediate resistance at 108.00 followed by 108.40 and 108.90. Immediate support can be found at 107.50 and 107.20. The US Consumer Price Inflation report could turn this currency pair around, if it underwhelms. Expect more speculative JPY long bets to cover with a likely range today of 107.60-108.10. Prefer to sell rallies, as US CPI data may disappoint.
- AUD/USD – The Australian Dollar closed little changed amidst of all of this, maintaining a bid stance. AUD/USD traded between 0.68487 and 0.68846. The news of US delaying their planned tariffs on Chinese goods for two weeks lifted the antipodean currency to 0.6878 where it currently sits. AUD/USD has immediate resistance at 0.6885 followed by 0.6900. Immediate support can be found at 0.6850 and 0.6820. Market shorts will keep a bid tone to the Aussie into today’s ECB meeting. Look for a likely trading range of 0.6850-0.6900 today. Look to trade the range shag on this puppy.
Happy trading all.