ith the US dollar hitting four year highs,
against a basket of currencies and the euro continuing its inexorable slide lower, the pressure for the European Central Bank to do more to meet its mandate shows no sign of abating, despite eleven successive weekly drops from the highs we saw earlier this year
when the single currency came within a hairs breadth of 1.40.
Since then the euro has fallen over 9% and yet data this week is expected to show that the European economy remains mired in a low growth, low inflation sink hole, ahead of this week’s October ECB rate meeting.
One month on from the ECB’s September’s announcement of a further reduction in headline interest rates and the announcement of further steps to ease credit there remains little sign that inflation is starting to bottom out, or the economy is set to improve.
If anything sentiment continues to remain fragile
as shown by weak demand at the recent TLRTO and this week’s ECB rate meeting in Naples could well see a little more colour added to last month’s announcement of a new ABS program, though it is hard to see what difference any further measures can make with loan demand so weak.
In truth the ABS market in Europe still remains fairly small,
which is probably why President Draghi was rather evasive when asked about how big this new program might be at last month’s press conference. Some estimates have put the figure as low as tens of billions of euros, which when compared to the €400bn TLTRO programme is pocket change.
We can also expect to see President Draghi insist that without significant structural reform at the same time, any further measures merely defer the hard decisions
and make the prospect of difficult discussions about full blown QE that much more likely, in the process straining the political consensus even further as Germany is backed further and further into the QE corner.
This political consensus is unlikely to become any easier given recent successes by the Eurosceptic AfD in Germany
, while French politics became much more difficult over the weekend after President Hollande lost his majority in the French Senate, which is likely to make French politics more partisan than it already is.
While there is no question that President Draghi has done a fantastic job in averting disaster in the euro area over the past few years,
at some point he is going to have to put his money where his mouth is. As soon as markets doubt that the ECB can deliver on the prospect of full blown QE then we could well see peripheral bond yields start to edge back up again, and equity markets continue to slide.
It is simply not credible for French and Italian politicians to insist that the ECB must do more
, given the job the ECB, and more importantly Mr Draghi has done since July 2012, in averting a full blown euro crisis.
These politicians now have to deliver,
and that for now, remains the great imponderable, and is likely to remain so for some time to come.
Today’s EU inflation numbers for September
, are expected to remain at 0.3%, with core prices stuck at 0.9%, with the recent fall in Brent crude prices hardly likely to help in this regard.
The unemployment numbers are expected to show the continued divergence between Germany where it is at 6.7%, and Italy where it is expected to remain at 12.6%
, while in the broader euro area it is set to remain at 11.5%.
While this week’s September German, French, Italian and Spanish manufacturing PMI data is expected to show that Europe’s problems remain deeply embedded,
as the effects of Russian sanctions continue to sap sentiment, the latest data from the US is expected to increase speculation about the timing of a Fed exit strategy
given that the end of QE will be formally announced at the end of this month.
With two dissenters now on the FOMC
, attention is now shifting to when rates might rise and this week’s September ADP, ISM and Non-farm payrolls data
could well bring forward market expectations of the timing of when this might occur, and raise expectations as to when that key phrase “a considerable time” might be removed from the Feds statement.
Markets will also be focussing on Friday’s jobs report
particularly in light of how poor the August number was and whether we see a significant upward revision, from the 142k number which was the lowest number this year.
Now that the uncertainty surrounding the Scottish referendum is out of the way in the short term investors can now refocus their attention on the health of the UK economic recovery and while today’s UK Q2 GDP revision isn’t likely to tell us anything we don’t already know
, with growth of 0.8% confirmed under the new accounting standards, it is this week’s PMI data that could tell us whether or not the slowdown in the manufacturing sector seen in the August numbers continued in September.
Last month’s 52.5 was still good but it was still a 14 month low
and one of the reasons could well have been the uncertainty surrounding the Scottish question, which could well have trickled down into the construction and services sector as well.
– the decline in the euro continued last week, for the 11th week in succession, as it made its lowest levels since November 2012 lows at 1.2660. This is the next support and obstacle to further declines towards the 1.2400 area. Resistance now comes in at the 1.2785 level which was the 61.8% retracement of the up move from 1.2045 to 1.3995.
– the pound has thus far remained well supported just above the 1.6000 level but appears to be showing signs of sliding back again after slipping below 1.6270 late on Friday. Having lost some of its safe haven allure in the wake of the Scottish referendum it could well revisit the lows this month if we slip below 1.6150. Resistance comes in at 1.6280 and behind that at 1.6420.
– the 2012 lows at 0.7754 are coming into view after last week’s sharp move and close below the 0.7875 level, which had shown some support earlier this year. This 0.7875 level should now act as resistance in the near term for further euro weakness towards levels last seen in October 2008 at 0.7690.
– the US dollar’s next target is the 110.65 level which is the August 2008 highs after this month’s break above the 105.50/60 area. This break was hugely significant but we are looking increasingly overbought and at risk of a pullback. A move below 108.25 could well precipitate a sell off towards 107.00.
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