European stocks look set for a lower open on Thursday ahead of the September meeting of the European Central Bank. The FTSE 100 is expected to drop with earnings from Dixons Carphone in focus.
Stock market trading has been muted so far this week but has the promise of a new spark of life from the European Central Bank. The central will announce its first policy decision since the Bank of England eased policy in August in response to concerns over Brexit.
There is a chance of some central bank one-upmanship. The ECB could decide it wants to add stimulus in equal measure to the Bank of England to defend the Eurozone from any unwanted economic consequences of Brexit. Since ECB policy is already very accommodative and the BOE has taken some political flak for its decision to ease policy so soon after the referendum, the ECB is unlikely to make major changes. Via a downgrade to the ECB’s economic forecasts, Mario Draghi can hint at more stimulus if needed in the coming months.
There is some scope for the European Central Bank to extend the end date of asset purchases or change the composition of those purchases. Both for different reasons. Eurozone inflation remains stubbornly low. This in the mind of a central banker means a longer time is needed for the policy to work, rather than it isn’t working and should be stopped. It’s estimated that the ECB could significantly crowd out some areas of the bond market by December, meaning it may need to change the rules on which bonds it can buy. A change to the capital key would be a big step and thus unlikely at this stage, since it would risk accusations of monetary financing.
The euro has rallied into the ECB meeting this week, but largely as a function of US dollar weakness following the slump in US ISM data and a slowdown in the August payrolls. It’s hard to imagine anything from the ECB can change the unwinding of dollar bulls after the recent run of poor US economic data. Still. EUR/USD up near 1.125 sets the bar lower for a bearish reaction to a dovish ECB.
EURUSD – After the topside break of 1.1245, the euro stalled with a harami on Wednesday. Next potential resistance from 1.1340 then 1.1365 with 1.12 then 1.1130 as possible support.
GBPUSD – Cable dropped back from 1.3450 on Wednesday, just short of possible resistance at 1.3480 with 1.3370 now immediate possible support.
EURGBP – The euro Sterling pair has completed a morning star pattern on the daily chart at 0.8340, adding to chances of a bounce towards possible resistance at 0.8485. A break lower could find support at 0.8250.
USDJPY – Dollar yen has dropped through another swing low at 102.80 before forming a hammer just above 101. Next potential support is still 101 then 100 with 102.80 now possible resistance.
Equity market calls
FTSE100: to open 7 points lower at 6,839
DAX: to open 5 points lower at 10,747
CAC40: to open 9 points lower at 4,548