Mario Draghi disappoints the doves, leads to Fed rate cut jitters ahead of next week's FOMC meeting.

SUMMARY

ANALYSIS

USDCAD

Dollar/CAD broke out above trend-line resistance in the 1.3160s overnight as the “Fed rate cut trade” continued to lick its wounds following yesterday’s ECB meeting.  The European Central Bank kept the deposit rate unchanged at -0.4%, which disappointed some of the doves coming into the meeting as the OIS market was pricing in a 40% chance of a 10bp cut.  What is more though, Mario Draghi admitted there wasn’t even any discussion about rate cuts within the governing council at the ECB.  He said they’re not happy about the current inflation situation but want to see “more projections” before taking action (what more do you need to see?).  He said the risks around the global growth outlook continue to tilt to the downside, citing geopolitical factors including Brexit, slowing in China, and trade uncertainties as weighing on sentiment.  He even said the European manufacturing outlook is “getting worse and worse”.  But hang on, there’s no reason to be gloomy, according to Mario Draghi, and the risk of recession is low (so what are you saying Mr ECB President?).  If you ask us, this was another embarrassing display of central bank double-speak and not knowing what to do in the current economic climate.  The ECB casually admitted to this in its press release by tasking its committees to come up with other options to reinforce “its forward guidance” (ie. it’s hope) on policy rates, including “potential new asset buying”.  So what to do in the meantime?  Do nothing.  Think of the ECB, the Fed and the rest of the world’s central bankers sitting at a poker table -- it’s Mario Draghi’s turn to bet but he taps his fingers, says “check” and looks at Jerome Powell (who is next in line at the table).  Essentially, this is Mario Draghi saying “I don’t want to ease more yet (because I don’t know what to do)…you first Mr Powell”.  And it is this “do nothing” that we think ultimately spooked the “Fed rate cut trade” yesterday and led to broad USD buying after the ECB meeting.  What if Jerome Powell disappoints the markets too?  The US just released its preliminary GDP figures for Q2 2019 and they beat expectations (+2.1% vs +1.8% on the headline and +4.3% vs +4.0% on Personal Consumption).  This is now adding insult to injury for the USD shorts that didn’t cover yesterday.  USDCAD, in particular, has now extended north to test chart resistance near the 1.3200 level.  This could be a long day as all the pundits will come out and start debating what the Fed will do next Wednesday.

USDCAD DAILY

USDCAD HOURLY

SEP CRUDE OIL DAILY

EURUSD

It sure looks like a lot of traders got hurt by the ECB meeting yesterday, if we look at the charts for EURUSD.  The market initially spiked lower on the ECB press release, but then violently corrected higher during Mario Draghi’s press conference.  However, then worries started to set in that Jerome Powell might disappoint markets next week as well and with that broad USD buying came in as bonds, gold and Eurodollars sold off.  Trend-line chart support in the 1.1140s held by the NY close, which was somewhat positive technically, and there’s been limited follow through to the downside now following the upbeat US Q2 GDP report (another mild positive).  All this could point to a bounce for EURUSD heading into next week’s Fed meeting, but the market needs to close today’s trade above the 1.1140s in our opinion.  Fed fund futures are currently pricing in 81% odds the Fed cuts 25bp next week and 19% odds they cut 50bp.

EURUSD DAILY

EURUSD HOURLY

AUG GOLD DAILY

GBPUSD

Sterling fell lower into familiar chart support at the 1.2450s amid the Fed rate cut jitters that started to spread after the ECB meeting.  We think the EU’s negative response to Boris Johnson’s speech in parliament also weighed on GBP sentiment.  The 1.2450s fell in early European trade today and the 1.2425 support level has now just given way following the positive US GDP report for Q2.  The EURGBP cross has completely repaired its technical breakdown below the 0.8920s yesterday, and is now attempting to break back above the 0.8960s.  Markets are coming to grips with reality (again) in that the EU will not re-open the withdrawal agreement despite tough talk from the new British PM.  We think a strong move above the 0.8960s should keep GBPUSD on the defensive into next week.

GBPUSD DAILY

GBPUSD HOURLY

EURGBP DAILY

AUDUSD

There’s was no hockey stick save into the NY close for AUDUSD yesterday, and the broad demand for USD following the ECB meeting didn’t help with that.  The market slipped below chart support in the 0.6930s during early European trade today and has since dripped further following the better than expected US GDP report.  We think it’s safe to say that AUDUSD sellers are back in charge now, so long as the market stays below the 0.6980-0.7000 level.

AUDUSD DAILY

AUDUSD HOURLY

SEP COPPER DAILY

USDJPY

Dollar/yen defied our near term market outlook yesterday, but honestly so too did the ECB.  Mario Draghi’s “do nothing” of a meeting caught many people off guard in our opinion and gave the USDJPY the fuel it needed to finally break above the 108.10-20 level.  This morning’s positive US GDP report led to a brief spike higher into chart resistance in the 108.80s, but that move is now fading as the “Fed rate cut trade” tries to recover here (bonds, gold, Eurodollars all off session lows).  We think USDJPY will consolidate between 108.80 and 108.50 to close out the week.

USDJPY DAILY

USDJPY HOURLY

DEC 3-MONTH EURODOLLARS DAILY

Charts: TWS Workspace

About the Author

Erik Bregar - Director, Head of FX Strategy

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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