Over the past two years ECB President Mario Draghi has done a masterful job of keeping up the pretence that the European Central Bank would do “whatever it takes” to hold Europe together with the implied promise that it had the tools to launch a large scale asset purchase program if it really needed to.
Ultimately though the ECB President was always a hostage to European governments using the time he bought for them wisely to implement structural reform programs to help mitigate some of the problems in the euro area.
It has now become apparent that he is becoming boxed in by the Germans on one side, who remain implacably opposed to even the modest measures announced yesterday, and the rest of the ECB members, particularly the Italian and French governments, who have remained either unwilling or unable to use the time bought for them to even scratch the surface of structural reform.
The end result yesterday was that Mr Draghi ended up pleasing no-one, and the markets, expecting some significant detail about a large scale €1trn easing program, got some pretty vague promises about starting asset purchases this month, including Greek and Cyprus junk rated bonds with strict conditionality, but on an insufficient scale to really alter the economic dynamics, currently at play in Europe, sending stock markets sharply lower.
He deflected questions about the size and scale of the program, but there was no escaping the perception that the ECB President was trapped in a corner, prevented from implementing the sort of “shock and awe” type of program needed by German objections and hostility.
Unless Germany performs a major policy U-turn it is unclear how much further the ECB can go, given political unwillingness on the part of France or Italy to fulfil their parts of the structural reform bargain either.
That being said we look set to open higher this morning after a late rally in the US saw a flat finish as we finish up the week with investors looking towards this afternoons US September employment report.
Before that we have the small matter of Spanish, Italian, French and German services PMI’s for September, but these are merely expected to reinforce the difficulties and politics at play in the euro area.
On the one hand we have Spain who have implemented some painful reform programs expected to post a number of 56.8 and Italy who have barely started, coming in at 49.6. France services PMI is expected to come in at 49.4, while German services PMI is expected to come in at 55.4.
The main event remains the US September employment report, and with the Federal Reserve ending its stimulus plan at the end of this month investors are hoping that jobs growth returns to the numbers we have seen for most of this year, above 200k.
Last month’s August number was the lowest print this year at 142k, well below expectations of 225k, and the hope is that this was an outlier, and will be revised upwards, with the September number expected to come in at 215k.
The concern is that given some of the data seen this week, which has been on the weak side, we could well be seeing a little bit of a slowdown as we head into Q4.
The unemployment rate is expected to remain at 6.1%, but it is worth keeping an eye on average hourly earnings, which are expected to move further above the Fed’s 2% inflation target to 2.2% for September from 2.1%
EURUSD – this week’s low at 1.2570 appears to be holding for now as we look for a move towards the 1.2400 level. Yesterday’s move above 1.2670 suggests we could be in for a wider move higher towards the 1.2785 level which was the 61.8% retracement of the up move from 1.2045 to 1.3995, and was support on the move lower.
GBPUSD – the pound continues to show a worrying lack of vitality slipping to its lowest levels this week yesterday the risk is we could slip back towards the September lows at 1.6050. The 1.6000 level is a key barrier to a sharp move lower towards 1.5870. The pound needs to recover above resistance at 1.6280 to stabilise and argue for move towards 1.6420.
EURGBP – having held above the 2012 lows at 0.7754 the euro looks ripe for a short squeeze back towards the 0.7875 level, which had shown some support earlier this year. While we remain below this level the bias remains for euro weakness towards levels last seen in October 2008 at 0.7690.
USDJPY – a key reversal day on Wednesday suggests we could well see further weakness on a break below 108.00, and argue for a test of the 106.20 area in the coming days. Only a move back above 109.00 stabilises.
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