Thursday Focus: ECB prospects in flux and currency wars

The ECB was not the only game in town on Thursday as currency volatility continued to flare-up across major pairs.

A fast-moving game of ECB

The ECB was not the only game in town on Thursday as currency volatility continued to flare-up across major pairs. But the central bank’s announcement and commentary this afternoon was still a moveable feast by late morning. That increases the risk of unpredictable market reactions.

It’s less “early” than you think

Expectations have now coalesced around a pared back view of the European Central Bank’s previous signal that it would revise guidance “early” in 2018. That came after the euro’s extension of its one-year advance to 17% this week forced Eurozone bond yields to catch-up. ECB President Mario Draghi even found the cap on inflation urgent enough to address before Thursday’s policy statement. He downplayed rebounding energy prices and dismissed market moves as statistically insignificant side-effects.  Already glacial inflation forecasts could therefore be revised only by low-single digit basis points.

Euro move could be 110 points

However, the euro could gain as much as a percentage point versus the dollar if the ECB fails to confirm December as QE’s endpoint.  Two-way short-term EUR/USD option bets in the current EUR/USD range required a move of at least 110 pips to break even at last check. High demand for the trade suggested traders saw such a move as likely.

However, a more nuanced tone from the ECB and Draghi could bring a typical post-ECB euro decline and bounce to new daily highs. With weekly tops from the last quarter of 2014 smashed this week, attention is now on December 2014’s last spike to $1.2569, before the slide to $1.04 in March 2015. If Draghi proves double-sided instead of dovish, we expect the EUR/USD to target $1.2569.

Currency warning shots

After the yen’s flash of overnight volatility, it has snapped back into its 109.47-108.93 Wednesday range. The pair ground 75 sen lower as speculators tested liquidity at lower levels. The seemingly choreographed tariffs-Mnuchin-Ross sequence of events and comments suggested currency counter-aggression. In reality, no hard and fast conclusions can be drawn. But the yen’s spike move shows eye-catching incursions into September 2017 lows are not improbable, even as a dollar bounce looks more imminent.

Cable’s latest ‘top’

Such imminence was not at all visible in sterling trade.  A new 19-month peak was notched early in Europe, just 4.6% below Referendum Day’s high of $1.5022. Trading predicated on a possible hint of a transition deal is quite visible now. Sterling is vulnerable in this rarefied air. Failure to close above the open of the week ending on 24th June 2016 ($1.4349) will be the first sign of trouble, for the bulls.

Gold challenges stocks

The sea of calm in U.S. stock markets contrasted with nerves in Europe, where the DAX led wary indices slightly lower. There’s a protective bid in case ECB Day turns into a euro field day.  FTSE trends remained multifaceted after the benchmark led Wednesday’s intraday sell-off. A sterling fall is the missing piece of the jigsaw for FTSE buyers with oil and gold rising and copper rebounding. The FTSE’s earnings plate hots up next week. Anticipation of clearer upside impetus keeps some money on the sidelines for now. Risk-off warnings flashed by gold and yen firmness also challenge stock market uptrends.

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