That certainly feels like the way markets have been acting in recent months when potentially debilitating news poses risks to broader markets before they turn a blind eye (as it would seem) and look on the upside. Broader global data remains robust and economies continue to signal strong fundamentals which has been the backbone of the catalyst for moves higher. The risk is that much of this can be put in jeopardy at the stroke of a pen. Overnight US President Trump revealed details of his proposed tariffs and signed off amidst much criticism. However in true Trump style there was some major deflection as it was announced that a potential meeting will take place with North Korean leader Kim Jong-Un. The tariff/trade war rollercoaster will have its baring on market sentiment and Trump even opened the door for individual nations to modify/remove tariffs. The USD was stronger on the day however, US equities closed higher and overnight we’ve seen the Asian session close in the green
The real masterpiece of market action yesterday however, was Mario Draghi’s delivery during the press conference and Q&A session following yesterday’s ECB meeting. The announcement itself was a non-event, no change as expected and markets then looked towards the press conference. The euro rallied some .35% post initial announcement and rose even higher as Draghi started his press conference indicating that they had underestimated growth expectations and revised forecast higher for GDP up to 2.4% this year, they even removed the language suggesting they could increase the volume of asset purchases which is a very hawkish delivery. This risk for the euro was that this bullish outlook on the economy and hawkish stance on policy could send the euro soaring higher. It was looking that way until Draghi delivered his punch, with a downgrade to inflation expectations for next year to 1.4% (from 1.5%). Draghi also attributed much of the recent growth and of course the future growth outlook to the ample degree of stimulation already provided, while also stating this would need to be continued in order to boost inflation. To be fair the Draghi, he has been indicating this all along but it felt like given his bullish stance on the economy, he really wanted to hammer home the importance of continues easing to these projections.
Draghi also emphasized that QE would run until the ECB see’s sustained inflation adjustments, and given the downgrade of next year’s inflation forecasts that really shifts the dynamic on those expecting QE to just end in September. The ECB will also continue to re-invest for an extended period after net buying ends adding an even longer duration to their purchase program, it will still be additional easing to support the economy, while interest rates will remain at current levels well best net asset purchases. All in all Draghi delivered a bullish outlook on the economy while holding dovish stance on policy and with the European stocks traded higher while the Euro and Euro interest rate cures all dropped lower. The perfect scenario for the ECB. EURUSD dropped back from highs just below 1.2450 to test 1.2300, that level has held thus far this morning and markets may well be on hold until this afternoon’s labour market data from the US. A break below 1.2300 opens up a drop to 1.2260, but 1.1.2180 area is the key level EURUSD would need to breach to see a more sustained move lower.
Today’s major event will be the monthly Non-Farm payroll figure where the February employment report is anticipated to rise by 200K. With markets currently pricing in a March rate hike at close to 100%, we’d need to see a significant miss here to have any major impacts on the dollar. Markets will also be keeping a close eye on the average hourly earnings figure, we saw last month stronger than expected earnings figure cause markets to get into an inflationary spin triggering a selloff in equities, so expect tentative trading in the build up to the release.