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by Charalambos Pissouros

Equities Keep Trading North, ECB Delivers New Stimulus Package

Major global equity indices continued trading north yesterday, perhaps due to the latest optimism surrounding the US-China trade front, but also due to hopes of more easing by major central banks after the ECB announced a new stimulus package. The Bank cut its deposit rate by 10bps and announced a restart of its QE purchases. The euro tumbled on the announcement, but hit support near the low of September 3rd, and then, it rallied. This may have been due to technical buying or because some participants were expecting a larger cut and/or a larger amount of monthly asset purchases.

Investors Continue to Buy Equities on US-China Optimism

The dollar traded mixed against the other G10 currencies on Thursday and during the Asian morning Friday. It gained against NZD, NOK, CAD and AUD, while it underperformed versus EUR, SEK, CHF, and slightly against GBP. The greenback was found virtually unchanged against JPY.

USD performance G10 currencies

By looking at the FX performance table, someone would have assumed that yesterday was a risk-off day. All commodity-linked currencies traded on the back foot, and although the yen was found unchanged, the other safe-haven, the franc, strengthened. That said, that was not the case. Shifting attention to the equity world, we see that major EU and US indices closed once again in the green, while today, Japan’s Nikkei 225 gained 1.05%. Chinese markets stayed closed due to the Mid-Autumn festival.

Major global stock indices performance

Investors may have continued buying equities due to the latest optimistic headlines surrounding the US-China trade front, but also due to hopes that other major central banks will follow the ECB’s footsteps and ease more in order to stimulate their economies.

On the trade front, the headline that may have boosted investors’ confidence may have been one saying that US President Trump is considering an interim deal with China, which would delay or even scale back some tariffs for exchange of commitments on intellectual property and agricultural purchases. With more and more development suggesting that the world’s two largest economies are willing to work out their differences and find common ground, risk appetite could stay supported. Risk assets, like equities and commodity-linked currencies, may benefit, while safe-havens, like the yen and the franc, could stay under selling pressure. That said, our view has not changed. We are still reluctant to assume that this is the beginning of a long-lasting trend, unless we see signatures. With what we have seen up until now in this sequel, we cannot rule out things falling apart again.

FTSE 100 – Technical Outlook

From all the major indices, FTSE 100 is gaining the least. When all other major European indices are accelerating higher, the UK one is slightly lagging behind. Nevertheless, we can see that the buyers are still trying to lift the price of it higher. FTSE 100 is currently trading above a short-term tentative upside support line drawn from the low of August 23rd. Although the index may continue moving a bit higher, we do not exclude a possible correction back down before another leg of buying, hence why we will stay cautiously-bullish for now.

If initially, the price struggles to move either above the 7378 hurdle, or the 7396 barrier, marked by the low of August 2nd and yesterday’s high respectively, this could force FTSE 100 to correct a bit lower. The index might not even travel all the way to test the aforementioned upside line, as it may find good support near the 7325 zone, or the 7300 area, marked by the high of September 9th and yesterday’s low respectively. If we see a bounce from there, the price could rise again to the 7396 obstacle, a break of which might lead the index higher. This is when we will aim for the 7460 level, which is the low of July 25th.

If FTSE 100 breaks the previously-mentioned upside line and falls below the 7245 hurdle, marked by the intraday swing high of September 9th and 10th, the buyers may stay aside for a while and let the sellers dictate the rules. The index could then slide to one of its key support areas, at 7200, marked by the low of September 10th. But if the buyers are still nowhere to be found, a break of that area may lead the price to the 7157 level, marked by the intraday swing low of August 29th. Slightly below that lies another possible support area, at 7133, which is the high of August 28th.

FTSE 100 cash index 4-hour chart technical analysis

ECB Cuts Rates, Restarts QE, but EUR Rallies

Now let’s pass the ball to yesterday’s main event: the ECB policy decision. 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”, now they noted that they expect rates to stay at present or lower levels until they see inflation robustly converging toward their target.

ECB interest rates

The euro tumbled on the announcement of a fresh round of stimulus measures, and traded even lower after President Draghi noted that the risks surrounding the Euro-area growth outlook remain to the downside, even after the introduction of a combo of lower rates and a QE restart. That said, against its US counterpart, the common currency hit support fractionally above the low of September 3rd, at around 1.0926, which is also the lowest since May 2017, and then it skyrocketed to recover all the decision-related losses and trade even higher. Today, it was found as the main gainer among the G10s.

To be honest, it’s hard for us to find a clear fundamental catalyst behind the rebound and the rally. Maybe it was a technical buying after EUR/USD approached the 1.0926 level, or it was because some participants have been expecting a larger rate cut and a larger amount of monthly asset purchases. Maybe it was both.

The message we got from the meeting is that, following this stimulus package, the Bank still remains ready to ease further if needed. After all, Draghi said that clearly. 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,” the President said. What adds to such chances is that officials continue to see the risks surrounding the Euro-area growth outlook as tilted to the downside. As far as the euro is concerned, we can’t say for sure where it may be headed next. Perhaps it will depend on what other central banks may decide to do at their upcoming gatherings.

With that in mind, focus now turns to the FMOC and the BoJ decisions next week. The former is widely anticipated to cut rates by 25bps, so all the attention will fall on what policymakers intend to do after that. According to the Fed funds futures, apart from a cut next week, investors are nearly pricing in another one by the end of the year. Thus, a disappointment could bring the dollar under buying interest, and thereby EUR/USD could slide again. With regards to the BoJ, following reports that the Bank is more open to discuss the possibility of further easing next week, all the focus will be on whether officials will indeed decide to act as early as at that meeting.

EUR/USD – Technical Outlook

Yesterday was a very volatile day for the euro pairs, as we saw the common currency initially falling against its major counterparts, but then quickly recovering all of the initial losses and eventually ending the day well in the positive territory. Looking at the EUR/USD chart, we may see a bit more upside, as some buyers, who missed yesterday’s rally could try and jump into the pair today. That said, looking at the technical picture of the 4-hour chart, unless the rate is able to overcome the short-term tentative downside resistance line taken from the high of June 25th, we will remain a bit sceptical about larger extensions to the upside. This is why we will stay slightly neutral for now.

EUR/USD might get another boost from the buyers today and it may travel towards the 1.1094 hurdle, or even to the aforementioned downside line, which may keep the rate down. If so, the bears might re-enter the field and send the pair sliding back to the 1.1055 obstacle, which is the high of September 11th and is acting as a good support area this morning. If that obstacle eventually is not able to withstand the bears, a break below it could drag the rate all the way to the 1.1015 level, marked by the lows of September 5th and 9th.

Alternatively, if the aforementioned downside line fails to act as a good resistance obstacle, its break could mean a change in the short-term trend and may send the rate higher, as more buyers might see it as an opportunity. The pair might then climb above the 1.1130 area, this way attracting a few more buyers. But in order to get more comfortable with further upside, a break of the 1.1164 barrier, which is the high of August 25th, is required. Only then we may start considering slightly higher areas, like 1.1190, a break of which could push EUR/USD further up. This is when we will aim for the 1.1230 level, marked by the high of August 13th

EUR/USD 4-hour chart technical analysis

As for Today’s Events

From the Eurozone, we get the wages and labor cost yoy rates, but no forecast is currently available. In the US, both the headline and core retail sales rates for August are expected to have declined to +0.2% mom and +0.1% mom, from +0.7% and +1.0% respectively. The preliminary UoM consumer sentiment index for September is also coming out and it is anticipated to have risen to 90.9 from 89.8.

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