Overnight Headlines
- President Trump: Will Consider An Interim Trade Agreement With China
- UK PM Johnson Urged By Cabinet Allies To Ask For Brexit Extension
- DUP Leader: Won't Support Brexit Deal Dividing Internal UK Market
- EU's Barnier Remains Pessimistic On Brexit Deal By Mid-October
US equities rose to near record levels as Wall Street reacted to more positive trade war news. The Dow moved higher for a seventh consecutive day which has not been seen since August 2017. The S&P breakout from last month's range has predictably been strong with another classic breakout from compression on Wednesday. Momentum indicators are still strong but we would expect some consolidation after a few days of range expansion.
USD traded softer after a day of mixed economic data. We have rejected the highs above 99 and the lows below 98 on the DXY this week which means we could see range trading over the next few days at least.
US bonds had a particularly volatile session, driven in part by the ECB but also from higher US core CPI and Steven Mnuchin’s hints at 100-year issuance. Yields have advanced for five straight days, a move last seen at the start of the year.
We certainly got volatility in the euro yesterday after the ECB walked the walk and revealed a significant easing package. The measures were broadly in line with expectations in terms of rate cuts (a 10bp reduction in the deposit rate and a signal of more to come) and mitigating measures for banks (more generous refinancing conditions and a tiered deposit rate system).
However, the restart of QE was a mixed bag, as the size was a slight disappointment (EUR 20bn per month). And even though the programme is open-ended for the first time since the ECB launched the asset purchase programme, there was no discussion on changing the limits on asset purchases. This important detail essentially means only a small-sized amount of purchases. As such, the macroeconomic impact of these measures will be relatively modest and not sufficient to raise inflation significantly over the next 2-3 years.
EUR/USD initially sold off on the open-ended QE announcement, but bounced back after details of the tiered deposit system was announced. Once the markets have fully digested the 'shock and awe' approach of multiple measures, enthusiasm for buying the euro may be tested as long-term growth will remain subdued and easing measures stay in place.
However, if the ECB is really now out of monetary policy weapons with the last rate cut in this cycle, then all eyes turn to new President Lagarde in her efforts to revive Eurozone growth through fiscal policy.
Towards the end of the Draghi press conference, stories hit the wires that US had discussed offering China an interim trade deal that would delay some tariffs in return for concessions on the issue of intellectual property rights and purchases of agricultural goods. Although the White House later denied this, risk assets moved modestly higher amid renewed optimism over another potential breakthrough in the trade war.
Currency Majors
EUR spiked lower as we have mentioned, two points away from its cycle lows at 1.0925 before rebounding to a high of 1.1086 during late NY hours. The outsized 1-day range of 161 pips, the second largest in 2019, has clouded the near-term outlook. The failure to crack 1.0925 coupled with the sharp upswing suggests the bias is now tilted to the upside. Resistance comes in just above 1.11 which is the top of the descending channel from June, and then 1.1130.
GBP is consolidating its recent short squeeze gains around 1.2350. The loss of support around 1.2300/10 will drive Cable back to retest major support in the low 1.22s. On the flip side, renewed gains through the upper 1.23s should see the recent GBP rebound extend to 1.25.
JPY is the weakest major currency this week and month, and is now bumping up against the 100-day moving average. Price action has resulted in a sharp pick-up in momentum and dollar strength could carry it higher to the next band of resistance at 108.50. On the downside, only a break of 107.20 would indicate that the current upward pressure has eased.
Key Events
Focus remains as ever on any headlines about a possible interim trade deal between the US and China. The repercussions of yesterday's eventful ECB meeting will also impact.
US Retail Sales for August are due to be released at 1230GMT. This volatile series has been strong recently due to resilient consumption growth. Fundamentals still remain buoyant with expectations for an increase of 0.3% m/m.
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