Today, the main event is likely to be the ECB monetary policy decision. However, given that this will be Draghi’s last dance, we don’t believe that we will get any material information with regard to the Bank’s possible future course of action. We just expect a reiteration of the verdict that the Council remains ready to adjust its tools if needed. Apart from the ECB, we have two more central banks deciding on interest rates today: the Riksbank and the Norges Bank.
After a not-so-eventful day, the euro was found lower against most of the other G10s this morning, trading roughly within a ±0.40% range. The common currency underperformed versus GBP, NOK, SEK, NZD and CAD, while it gained against JPY, CHF and USD. It was found virtually unchanged against AUD.
Today, the center of attention for EUR-traders is likely to be the ECB policy decision. Back in September, the Bank decided to cut its deposit rate by 10bps, to -0.50%, and announced a restart of its QE program from November 1st, at a monthly pace of EUR 20bn, with the new round of purchases being open-ended. The forward guidance was changed to an open-ended one as well. While previously the Governing Council has noted that interest rates are likely to stay “at their present or lower levels at least through the first half of 2020”, this time, they noted that they expect rates to stay at present or lower levels until they see inflation robustly converging toward their target.
Since then, PMIs for September disappointed, while both the headline and core CPI rates for the month stood well below the Bank’s objective of “below, but close to 2%”. Thus, investors may be on the lookout for clues as to whether the ECB remains ready to act again if needed. At the press conference following the last decision, President Draghi said clearly that the Governing Council “continues to stand ready to adjust all of its instruments as appropriate to ensure that inflation moves towards its aim in a sustained manner,” and we expect him to reiterate that view, although the ceasefire between the US and China is pleasant news for ECB policymakers. However, given that this will be his last gathering as ECB Chief, we don’t believe that he will go beyond that, as he would like to avoid limiting the options and choices of his successor, Christine Lagarde, as well as raising more tensions within a divided Council after the September stimulus package.
As they try to figure out what the ECB’s steps will be in the post-Draghi era, traders of the common currency may also pay extra attention to the preliminary Euro-area PMIs for October, which come out ahead of the ECB decision. Both the manufacturing and services indices are expected to have risen somewhat, something that would drive the composite index up to 50.3 from 50.1. This would be far from suggesting a decent rebound in the bloc’s economic activity and is likely to keep the door open for further stimulus if needed, despite Draghi refraining from bolstering such expectations later at the ECB press conference.
After hitting the 1.1180 barrier on Monday, EUR/USD started slowly drifting lower. That said, the rate still remains above its short-term upside support line drawn from the low of October 1st. This is why the recent move down could be seen as part of a temporary correction before another leg of buying, especially if the pair continues to trade above that upside line. We will take a cautiously-bullish approach, at least in the near term.
A slight drop lower could extend the correction and could bring the pair back to the area around the 1.1110 hurdle, or it could even force EUR/USD to test the aforementioned upside line. If that line holds, more buyers may take advantage of the lower rate and join in. The pair might then accelerate to the upside, bypassing the 1.1110 zone, or the 1.1138 obstacle, marked by Monday’s low. Our next target could be the high of this week, at 1.1180.
Alternatively, if the aforementioned upside line fails to provide support and breaks, and also the rate slides below the 1.1163 zone, this might spook the bulls from the field and more bears may take action. This is when we will aim for the 1.1022 obstacle, a break of which could set the stage for a test of the psychological 1.1000 level. That level marks the low of October 11th.
Apart from the ECB, we also have two more central banks deciding on interest rates today: The Riksbank and the Norges Bank.
Kicking off with the Riksbank, when it last met, the world’s oldest central bank decided to keep interest rates unchanged and maintained the view that they will be increased further towards the end of the year or the beginning of the next one. Sweden’s latest inflation data showed that the CPI rate ticked up to +1.5% yoy from +1.4% in August, instead of sliding to +1.3% as the forecast suggested, while the CPIF one held steady at +1.3% yoy. The forecast was for the CPIF rate to tick down to +1.2%. The core CPIF rate, which excludes the volatile items of energy, also held steady, at +1.6% yoy. The Swedish Krona rallied when this data set was out, suggesting that market participants may have revived bets that officials can still push the hike button before the turn of the year. Thus, it would be interesting to see whether this will be the case, and if so, whether they will give a more specific timing.
Passing the ball to the Norges Bank, at its last meeting, the Bank decided to increase rates by 25bps and noted that they will most likely remain at this level in the coming period. Since then, CPI data for September showed that the headline rate ticked down to +1.5% yoy from +1.6%, while the core one rose to 2.2% from 2.1%. Both rates stood slightly above their respective projections in the Bank’s latest Monetary Policy Report, and thus, we don’t expect this meeting to result in any fireworks. We just expect officials to reiterate that interest rates are likely to stay stable for a while.
USD/NOK seems to be stuck between two short-term tentative lines: a downside and an upside one. The downside line is drawn from the high of October 17th and the upside one is taken from the low of October 11th. Basically, the pair looks like it is coiling up, which means that we will wait for a clear exit out of that triangle before examining a further directional move, hence our neutral stance for now.
If USD/NOK breaks the aforementioned upside line and the rate falls below the 9.090 hurdle, which is the current low of this week, this might attract more sellers into the game and the pair could have a chance to move further down. This move would also place the rate below the 200 EMA on the 4-hour chart, which may be taken as a bearish indication and support further declines. This is when we will aim for the 9.050 area, which could provide some additional support and stall the pair. From there, USD/NOK could even rebound back up a bit. That said, if the rate remains below the 200 EMA, we will continue aiming lower. Another slide could break the 9.050 hurdle this time and the pair may drift further south, possibly targeting the 9.987 level, marked by the low September 24th.
On the upside, we will only start looking further north, if we see a break of the aforementioned downside line and a push above the 9.194 barrier, marked by the current high of this week. The next potential resistance in line could be at 9.210, which is currently the highest point of this year. A break of it would confirm a forthcoming higher high and USD/NOK might end up moving further north and possibly aiming for the 9.238 level, marked by the low of July 11th, 2001.
Apart from the Euro-area PMIs, we also get preliminary PMIs for October from the US as well. The manufacturing index is expected to have declined to 50.7 from 51.1, while the services one is forecast to have ticked up to 51.0 from 50.9. Strangely, the composite index is anticipated to have risen to 51.6 from 51.0.
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