So here we are, the day has finally arrived, its ECB day and a day that has been on the markets radar screens since the beginning of December, though last week’s events in Switzerland have helped pushed expectations even higher.
The decision by the European Court of Justice to issue guidance in favour of the principle of ECB bond buying
appears to have set off a chain reaction of central bank capitulation over the past week, starting with last week’s sorry events in Switzerland, and the decision by the SNB to unexpectedly remove its cap on the Swiss franc, which caused so much volatility in the hours afterwards.
In the wake of that decision last week we saw further capitulation yesterday,
as firstly the latest Bank of England minutes showed a return to consensus as the two hawks on the committee pulled their claws in
and reversed their calls for an increase in interest rates, potentially delaying any UK rate rise until well into next year. They were then followed soon afterwards by the Bank of Canada who also cut rates unexpectedly to 0.75%
as the bank reacted to the recent fall in crude oil prices.
At about the same time reports out of Frankfurt suggested that the European Central Bank was considering a sovereign bond buying program of €50bn a month starting in March
, and set to run through 2016, which would in effect come to around €1trn. It was also reported that no formal decision had been arrived at and that the numbers could well change, unfortunately having raised expectations further the ECB having raised the bar, now needs to deliver.
With most estimates of a plan expected to be in the region of €550bn until yesterday, this number was significantly above market expectations, and equity markets reacted accordingly, pushing higher.
Having seen market expectations rise further
with yesterday’s leaks, the main focus is now likely to be less on the amount, and more on what concessions Draghi has had to make to get the Germans on board, or even if they are on board, particularly given the size of the package that is being reported.
If the decision is not unanimous, which seems likely given the reported size of the package
, then the market should be prepared for legal challenges in the German courts, and it is in this context that any conditionality is likely to be key, particularly if the French and Italian governments show no signs of implementing further reforms.
One thing is certain, all eyes will be on Mario Draghi at ECB headquarters at 1:30pm UK time to see if he can deliver “whatever it takes”
; and given the circumstances it seems apt to channel and paraphrase a line from one of my favourite science fiction show episodes to send a message to Mr Draghi, with the market waiting: “con permiso Mr Draghi, the hall is rented, the orchestra engaged, now it’s time to see if you can dance”.
– momentum continues to favour the downside despite the rebound to 1 1680 yesterday but the risk remains for a rebound while above last week’s low at 1.1465. The key level remains at 1.1205, which is 61.8% retracement of the entire move from the 0.8230 lows and the 2008 highs at 1.6020. Any rebound looks likely to find resistance at 1.1750 and 1.1880.
– the pound appears to be ranging for now but we need to see a move beyond 1.5320 to diminish any downside risk. The key support remains at the lows this month at 1.5035, a break of which could see some stops triggered below 1.5000. towards 1.4810.
– we’ve struggled to rally thus far but the March lows at 0.7590 and this month’s low remain a key support level. We could see a short squeeze towards 0.7755 which is the main resistance, while a move below 0.7590 argues for further losses towards 0.7255, which had originally been the peaks seen in 2003.
– the US dollar seems to be finding a range between 117.00 and 119.00 and while we could see a retest of the 120.00 level, we could equally retest the recent lows. The key support remains just above the 115.60 level which is also potential neckline support for a forming head and shoulders pattern. A break of 115.60 could well see a sharp fall towards 110.00..
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