The long awaited European Central Bank (ECB) meeting injected volatility into the markets yesterday. 

The ECB lowered the deposit rate to -0.5% from -0.4%, and a fresh round of quantitative easing (QE) was revealed too. The stimulus package will be €20 billion per month, and it will begin in November.

The loosening of monetary policy was combined with a lowering of the growth forecast, and the CPI outlook was cut too. The central bank now expects the region to grow by 1.1% in 2019, and 1.2% in 2020, and the previous forecast was 1.2% and 1.4% respectively. The 2019, 2020 and 2021 CPI forecasts are now 1.2%, 1%, and 1.5%, and keep in mind the previous guidance was 1.3%, 1.4% and 1.6% respectively. In light of yesterday’s update it is fair to say the ECB stopped the previous round of QE too soon.

Mario Draghi, the head of the ECB, said that fiscal stimulus is needed also to help give the region a boost. The central banker made an appeal for fiscal assistance as he feels the monetary policy can only do so much, and a government bond buying scheme can’t last forever. Many eurozone banks are fragile, and it is likely that lending margins will be squeezed even further in light of the QE scheme.

In the wake of the announcement, the euro sold-off, but managed to find support and rebounded, and it appears that much of the dovish update was already priced-in. The major indices finished higher yesterday, but the gains we relatively small when you consider the rate cut and the stimulus programme.

The US indices saw volatility too as there was a report circulating that the President Trump was considering an interim trade deal with China, but that story was short lived as the White House made it clear it was ‘absolutely not’ contemplating such a move. The trading relationship between the US and China was given a lift in the early hours of Thursday when the US said it would delay a round of tariffs on Chinses goods by two weeks.

We have seen a lot of back and forth in the Trump administration, and yesterday was a great example of it, as late last night Trump said he would consider an interim trade deal with China, and that lifted stocks in Asia overnight.

It was a tale of two US CPI reports yesterday, whereby the headline CPI rate cooled to 1.7% from 1.8%, but the core reading edged up by 0.2% to 2.4%. The core update is deemed to be a better gauge of underlying demand, and it is clear that demand is robust. President Trump is screaming for the Fed to slash rates, but when you consider the ultra-low unemployment rate, the respectable earnings, and the frim demand, the Fed might not bow to the pressure from Mr Trump.

At 8am (UK time) Spanish CPI will be posted and the economists are expecting it to remain at 0.4%.

US retail sales on a monthly basis is tipped to grow by 0.2%, which would be a drop off from the 0.7% reading posted in July, and the announcement will be posted at 1.30pm (UK time).      

EUR/USD – snapped back last week, and if it holds above 1.1000, it might pave the way for 1.1164 to be retested. If the wider bearish trend continues it might target at 1.0900.  

GBP/USD – last Tuesday’s daily candle has the potential to be a hammer, and if it holds above the 1.2200 area, it might bring 1.2400 into play. Support might be found at 1.1900, should the wider bearish move continue.   

EUR/GBP – yesterday’s move might be a key reversal day, and a break above 0.9000, it might bring 0.9148 into play. A break below 0.8872, should pave the way for 0.8800 to be targeted.  

USD/JPY – rebounded last week, and if it holds above the 107.15 area – 50-day moving average, it might bring 109.31 into play. Should the wider downtrend continue it might retest the 106.00 area.  

 

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