Market News & Insights
2 October 2014

EUR in Crosshairs as Draghi Arms The Bazooka

EUR/USD 1.2625
GBP/USD 1.6195
GBP/EUR 1.2832 (0.7793)
EUR/CHF 1.2072
GBP/CHF 1.5492
GBP/AUD 1.8412

Despite the potential for a QE announcement from the ECB today European stocks led global indices lower, on a day when risk aversion was the primary play. There is no doubt that the trend in the euro is lower, this is unquestionable given the outlook for ECB policy and recent data backs this up, the single currency does hold the potential for a bounce however, especially if Mario Draghi and the ECB fail to meet market expectations, in that sense the lack of ECB action is a risk to EUR pairs.

The EUR was initially weaker in early trading yesterday following confirmation German manufacturing contracted through September, adding to already weak French figures and pulling the Eurozone reading lower in tandem. The negative trend continued through the US session which saw stocks trade lower once again and even the USD was in retreat despite a firm ADP employment figure. If we were ever looking for a confirmation of a risk adverse market it was evident in overnight trading, the Nikkei followed US and European stocks lower, down over 2%, while USDJPY also declined as haven status favoured the Yen.

As discussed above, the risk to the EUR (and EUR pairs) is not a continuation of the trend lower, we expected EURUSD to reach 1.2500 by year end and the rapid move lower makes 1.2000 a more realistic target again at this stage, with many making adjustments as the ECB pursue additional easing. EURGBP is also on the way down currently trading just above 5 year support which comes in between .7730 and .7750. Therefore the risk to current direction comes in the form of a EUR rally, which could occur if the ECB do not meet market expectations. This puts focus on the ECB’s potential asset purchase program. In last month’s meeting Mario Draghi finally confirmed what markets had been speculating for months, the ECB would adapt an asset purchase stimulus program, stating that the details on such would come after the October meeting. This is where the risk enters, markets have positioned themselves for drastic ECB action, they are looking for a program that stands up to the likes of the Fed and the BOJ. Draghi has mentioned expanding the ECB balance sheet to 2012 levels , between €800mln to €1trillion, if market expectations have been set too high, the potential for a bounce in the EUR is real, anything in line will see the EUR down trend continue.

Despite the obvious move to risk aversion the USD was under selling pressure, one of the primary risk adverse currencies, this shift represents a change in recent dynamics and highlights the rising concern over recent US data. It has been difficult to avoid the town criers saying the only way is up for the USD but Fed policy is still hinged on economic performance and recent data has left a lot to be desired. Yesterday’s ADP print was better than expected, but the ISM manufacturing print fell to 56.6 from 59, and below the expected 58.5. Later today we have weekly jobless claims and factory orders but the major focus will be on tomorrows Non Farm Payrolls. After two months of declines markets will be looking for a rebound in the labour market, expectations point towards 218k jobs added through September, anything less may well see additional profit taking as markets sell off USD.

GBP has struggled to regain its strength post Scottish referendum and as we have discussed focus has returned to the interest rate outlook for the UK, the BOE’s MPC will not meet until next week and thus far data has not been very supportive of GBP. Yesterday’s Manufacturing PMI print continued the global trend with the pace of manufacturing expansion slowing, the pace of growth falling to a 17 month low, later today we have construction PMI reading with the composite and service PMI reading due for release tomorrow. GBPUSD currently sits just above support at 1.6160, with the pre referendum low at 1.6055 just below.