This week’s trending topic is ECB. The consensus of forecasters foresees a 10bp rate cut at the upcoming meeting on September 12. How deep the central bank can go to is the multi-dollar question.  

The euro bulls failed to push the common currency above 20MA last week and this week as well despite some dollar weakness. They wait for the latest announcements from ECB in Frankfurt, followed by Draghi’s speech. Analysts are looking for a deposit rate cut and restarting net asset purchases.

The deposit (or depo) rate, currently set at -0.40% and having been negative now for the past five years (i.e., since June 2014), according to Nomura.

Risk appetite: Since early September the common currency volatility has been reduced on the back of positive developments in Italy and Hongkong and easing risk of no-deal Brexit and policy stimulus in China.

Looking back to the June and July meeting, Draghi sent clear signals that an easing package would be launched. We expect this is going to happen in the September 12 meeting.

“The expectations of Mario Draghi to deliver something big and effective are high,” Sentix said.

Besides, investors seem to be confident that the Fed will continue to cut rates. Geo-political risk like Brexit and Trade conflict are the contributing factors for Global economic slowdown in the past few months. Moreover, these factors show no signs of ending.

Sentix said, “The economic situation in Euroland remains tense, and the recent data suggests that the Eurozone is not far from a recession. In Germany, on the other hand, it must now be assumed that the economy will no longer grow.”

Data review: Eurozone manufacturing slump continues in August whereas Services Business Activity Index signaled a further solid increase in business activity during August.

  • Final Eurozone Manufacturing PMI at 47.0 in August (Flash: 47.0, July Final: 46.5). The index registered its second-lowest reading since April 2013 to indicate another notable deterioration in operating conditions.
  • Final Eurozone Services Business Activity Index: 53.5 (Flash: 53.4, July Final: 53.2). Remaining above the 50.0 no-change marks for a seventy-third successive month, the index recorded 53.5 in August compared to 53.2 in July.
  • The Sentix economic indices improved slightly in September to minus 11.1 points, according to the official release.

 

Data preview: Ahead of the ECB event macro data likely to take a back seat. 

Thu, September 12 ECB monetary meeting:  The consensus of forecasters foresees a 10bp rate cut at the upcoming meeting on September 12. Analysts are looking for a deposit rate cut and restarting net asset purchases.

Here is a gist of what analysts anticipate from ECB:

  • ING: All eyes on the ECB this week as months of buildup should now result in dovish action. A rate cut seems to be a done deal, the big question is whether renewed QE will be part of the package. The governing council is likely to remain divided on the topic as quite a few ECB speakers have come out against a reboot of the asset purchase programme in recent weeks. Markets have come down on the side of the doves on this one and disappointment is therefore a possibility come Thursday.
  • Danske Bank: On Thursday, we expect the ECB to announce (1) a 20bp cut in the deposit rate (other key rates unchanged) and an extended forward guidance (‘at present or lower…. well past the horizon of net asset purchases’), (2) a 12-month QE restart of EUR45-60bn per month and (3) a tiering system, which could involve less than 1:1 effect on EONIA from the deposit rate cut, where the ‘tiering premium’ may be worth around a quarter of the rate cut.
  • Nordea Markets: We expect the ECB to reveal an easing package consisting of several steps next week: 1. 10bp cut in the deposit rate. 2. Restarting net asset purchases at a pace of EUR 30bn per month (with the purchases starting in October). 3. Strengthening forward guidance by linking it more concretely to the inflation outlook.
  • Credit Agricole: We expect that on Thursday, the ECB will (1) cut its deposit rate by 10bp to -0.50%; (2) announce a sizeable QE2 programme (EUR30-40bn per month for 18 months); and (3) announce measures to support banks’ profitability as the negative rate environment may last for a long time (via easier terms for TLTRO3 and a tiered deposit system). At the same time, the ECB will likely make a slight downward revision to its growth and inflation forecasts.
  • Morgan Stanley:  A combo of policy measures including a rate cut with an associated mitigating mechanism, the restart of QE and extra forward guidance is likely to be announced. we think that the ECB will likely announce a 10bp rate cut to -0.50% together with a mechanism to mitigate the impact of negative rates, plus purchases of government and corporate bonds amounting to €30 billion/month for 9-12 months and a good dose of forward guidance.
  • Goldman Sachs: We expect a substantial easing package from the ECB next week (including a 20bp deposit rate cut, bond purchases of €30bn per month for nine months, and forward guidance emphasizing a commitment to keep rates low).
  • Scotia Bank: A deposit rate cut is widely expected and Scotiabank Economics expects a 10bps reduction to -0.5% whereas consensus is somewhat divided toward 10 or 20bps. A smaller reduction now may be followed by a further reduction later if not done in one fell swoop. The grander issue is whether the ECB is prepared to roll out another wave of quantitative easing, and if so, how much will it purchase, over what time horizon, and across what mixture of assets?
  • Nomura: We expect lower rates (10bp off the depo rate, another cut to come later in the year), an extension/reinforcement of guidance, deposit rate tiering and a restart of the asset purchase programme (€30bn per month until the end of 2020).

Technical view

The common currency marginally rose on Monday from the support of 1.1015, it’s last three days low. Whereas the euro bulls failed to push the common currency above 20MA previous week and this week as well despite some dollar weakness.

Looking at the recent elevation of market sentiment, the EURCHF outperform EURUSD, and this will continue as long as risk-on is the driver. 

The weekly trend of the common currency is range-bound with negative bias. The inability of EURUSD to sustain above the critical resistance of 1.1251 should be a negative indication for the bulls.  According to the daily chart, the key support level is placed at 1.1015/1.1000. In the near term, the price may fall to 1.0860 (if settles below 1.1000) suggested by the corrective A-B-C wave structure.

If the price starts moving higher, key resistance level to watch out for are 1.1140 and 1.1180. A decisive break out above 1.1085 could allow the bulls to raise the headroom towards its 50MA.

 

View: Ahead of the ECB meeting, we recommend selling on rallies.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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