Euro rallies as ECB runs out of ammo, pound higher, equities flattish
The rate of change in expectations
for ECB monetary policy has altered course.
The bulls just failed to push the S&P 500 over
the line yesterday but we could be on for it today. We topped out at 3,020 and
the bulls lost interest later in the session, closing at
3,009. Futures suggest a slightly positive open – bulls will be looking to
force the all-time high today, chasing 3,027.98 intraday, and a close above
Mixed messages on trade, try to ignore the noise – a
deal is a long way off. Trump says he would consider an interim deal – maybe,
maybe not, you just don’t know what’s truth amid all the fake news.
We sense a bit of disappointment after the
ECB despite the QE ad infinitum – Draghi delivered in many ways
but it’s just increasingly clear the ECB is out of ammunition.
For me Draghi delivered all he could with a last blitz of
stimulus in a kind of Butch Cassidy and the Sundance Kid type finale.
It’s clear the ECB cannot just keep cutting rates –
the baton will have to be passed sooner or later. Having taken some time
to digest the impact of the ECB decision, this would appear positive for
the euro – as we’ve talked about before, it’s the rate of change of
expectations for monetary policy, not the pace of change in the monetary
policy itself, that really drives currencies. And in this sense, it
seems expectations have materially altered course as markets accept that
there is no more ammo left. Catching a falling
knife it may be, and we caution that this is very early days indeed, but the
euro may be in the nascent stages of a long-term rally.
Draghi again called for structural reforms. And whilst
he admitted the mildly expansionary fiscal stance in Europe right now is mildly
supportive, nation states need to do an awful lot more. Fiscal reforms are
a must, but in highlighting this it simply shows the ECB cannot
do it alone. The statement was very dovish, but Draghi didn’t back it
up enough in the press conference.
The euro has rallied with EURUSD breaking resistance
at 1.11. Bulls need to look at the 1.1150 late August swing high, but
first the 50-day moving average will come into play and could cap gains. We’ve
now seen EURUSD touch 1.09250 twice this month and bounce quite hard, yet
the long-term downward trend remains the dominant force – but for how long? If
the market thinks the ECB really
now has run out of ammo, we could see a
rally for the euro. The September 3rd candle is a clear bullish
hammer reversal and the lows tested then have again been rejected on the
day of the reckoning itself and the descending narrowing wedge completes. This
would chime with the sense that the rising wedge on the dollar index suggests
we’re entering the top of the dollar rally.
Asia has been broadly higher. European equity
markets are flattish and looking for a bit of direction, but at send time
the majors were in the green, save for London.
The FTSE 100 is now in a dance with the 50-day line
around 7336. We look for a close above this for bulls to be in charge and try
to force 7400. However, sterling strength on the open may scupper any
The pound rallied hard in early trading with GBPUSD
breaking north of 1.24. Having cleared resistance at 1.2380, as long as this
holds today there is reasonably clear path to 1.2520.