European stocks to open lower ahead of the ECB

CMC Markets

European markets look set for a lower open as caution prevails ahead of the latest policy meeting from the European Central Bank.

It was a good day at the office for European markets on Wednesday as corporate results and expectations of dovish rhetoric from the ECB carried the German DAX back above 10,100 for its highest close since the EU referendum result.

US markets closed higher with Dow posting 9th gain after strong earnings from Microsoft which gave S&P500 tech shares their best day in 16yrs.

Stronger than expected unemployment data and a clean bill of health for the UK economy according to a survey from the Bank of England lowers the chance of aggressive monetary easing at the next BOE meeting. The BOE has heavily hinted at action in August so instead of leaving markets empty handed, it may just do something a little smaller. Cutting rates and more quantitative easing could be replaced with something more modest like a revamped ‘funding for lending’ scheme.

Reduced scope for monetary stimulus limited gains on the FTSE 100, and depending on the stance of the ECB, could see the index begin to underperform indices in Germany and France.

Data released on Thursday is expected to show UK retail sales dipped -0.4% in June. Given the pattern of stronger data seen so far this week, there is some scope for an unexpected rise. Better UK retail sales and any hints of stimulus from the ECB could take EUR/GBP below 0.82.

There is no real expectation of the ECB adding to measures only recently implemented at its meeting on Thursday. The euro has fallen and the German DAX has recovered most of its post-Brexit losses so there is no financial tightening for the ECB to combat. The central bank is likely to remain in wait-and-see mode.

The key, as is mostly the case, will be in the words of President Mario Draghi. Markets are looking for Mr Draghi to give some indication that the ECB is willing to act in case Brexit begins to weighs on the Eurozone economy. Any sort of vaguely specific timeframe for new stimulus could see EUR/USD finally crack the 1.10 handle, but given the likely inaction, a short squeeze appears more likely.

EURUSD – The euro has so far avoided a close below 1.10, forming a daily hammer-like pattern on Wednesday. The large downswing on June 24 through the bottom of its old trading range implies further downside towards 1.08.

GBPUSD – The pound closed back above 1.32 on Wednesday with a harami pattern, so avoiding a break below the potential short term potential head and shoulders pattern. Another test closer to the lows may be needed to establish a bottom.

EURGBP – Euro-Sterling was little changed again on Wednesday, sitting neat 0.83. A break lower could target the old swing high at 0.8117, though the uptrend favours another move higher to the high above 0 86.

USDJPY – Dollar-yen closed above 107, its 50-day MA and resistance from the June 24 peak near 106.8. It looks overbought short-term but the break of resistance suggests renewed strength that could carry it to back to 111.

Equity market calls

FTSE100: to open 19 points lower at 6,709

DAX: to open 11 points lower at 10,131

CAC40: to open 4 points lower at 4,375


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