Yesterday was all about risk and markets were hungry for plenty of it. The S&P and Dow both closed the day at record highs once again, supported by firmer earnings and rising fuel prices. The day started on a positive note in Europe as a slew of upbeat earnings estimates helped support major indices with the Stoxx 600 up more than .7%. In currency markets the Euro was slightly weaker on the day ahead of today’s key ECB meeting, while the USD managed a slight recovery, gaining ground against EUR, GBP, JPY, AUD and NZD in the last 24 hours. It’s was a mixed bag for sterling as small gains against the Euro were overshadowed by some under-performance vs USD, especially this morning after we broke through the post CPI inflation report lows. Broader sentiment has remained positive thus far this morning, S&P futures are at record highs again, in Asia stocks traded higher after the BOJ downgraded their inflation expectations resulting in JPY weakness, while European bourses have all opened positively this morning.
Today’s ECB meeting may not be about what Draghi says but how the market chooses to interpret it. By this I mean unless Draghi takes a considerably dovish approach and actively tries to talk down the Euro, it may well not be enough. This is simply because in recent months, despite best efforts from the ECB to emphasise the importance of QE in maintaining the economy at current levels, markets have ignored and preferred to focus on when the ECB will potentially tighten policy and scale back purchases. Let’s be clear here, at no stage have the ECB given any clear indication that they will scale back easing this year, in fact for the most part it would appear it has hardly been discussed other than some references from Draghi that the time is approaching when it will become suitable to discuss an exit strategy. That’s a given I would have thought, we cannot have QE forever and policy will need to be agreed, but much like the US Taper Tantrum several years ago, markets are trying to front run the ECB’s tightening plan.
EURUSD is up almost 12% from this year’s lows, in a time frame when the US raised interest rates, while the ECB continued to ease. EURGBP is up over 7% since mid April, a time frame we have seen BOE members shift to a more hawkish stance while nothing of major worth has come from the ECB. With EURUSD sitting near 2 year highs and levels the ECB have been uncomfortable with in the past, todays statement and press conference will be closely watched, and markets are expecting Draghi to really talk the Euro lower, if he disappoints then we’ll be pressing fresh highs in Euro crosses.
UK Retail Sales headline the rest of the day’s data as we have a quiet data calendar for the US session. GBP has found itself under some pressure this morning sales data may assist as they are expected to rise 2.5% through June, up from .6% in May. Sterling is looking for any good news it can this week following the downside surprise in inflation. EURGBP finds resistance around .8900, and topside towards .8950 which holds the year’s high line. .8829 provides light support and a break below there will see a move towards .8744. GBPUSD has broken back below 1.3000 and now 1.2808 area becomes key. Any rally back towards 1.3100 will almost certainly run into sellers so that’s the key range, 1.2800 to 1.3100.
EURUSD highs just above 1.1580 offer first resistance, with 1.1616 the 2016 high, and 1.1714 the 2015 high the next major levels to the topside. EURUSD will need to break below 1.1300/1.1270 area for additional downside to continue at that is where the first round of large EUR buyers will emerge.