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With No ECB Surprise Expected, Where Is the EUR to Go?

Finally, the market is atop of the two major market event risks this week: this morning’s European Central Bank (ECB) press conference with President Mario Draghi (at 13:30 GMT), and tomorrow’s U.S. nonfarm payrolls (NFP) details.

Investors are expected to get the biggest bang for their buck from tomorrow’s U.S. jobs report rather than today’s eurozone policy huddle in a few hours. The ECB has too many moving parts left unattended, while the NFP number will be neat, clinical, and delivered with no appendages, allowing investors to react to the market headline.
The eurozone economy has been flagging (growth and inflation expectations have been slashed), disinflation has the upper hand, and it’s only natural that expansionary measures expectations are rampant. Nevertheless, it’s not expected to happen this time around.
Inflation in the eurozone was +0.4% in October, barely improving on the five-year low of +0.3% in the previous month. Unemployment estimated at +11.5% in September still straddles Europe’s record highs. The ECB currently predicts inflation of +0.6% this year and +1.1% in 2015, with economic growth of +0.9% and +1.6%, respectively. Despite it all, the European Commission has already lowered its own outlook for the region this week, and that too is a strong enough argument for a looser monetary policy.
Few Expect ECB Fireworks
The consensus is that the ECB will not pull any surprises at today’s meeting, but it will perhaps tweak a few things. So far, this has allowed the EUR to edge higher (€1.2515) as the market expects the ECB to hold interest rates at record lows and refrain, at this time, of introducing any new easing policy measures. Regardless, investors will look for reassuring messages and signs that the ECB is primed and ready to wage war on deflation. For investors, as per usual, it will be the questions and answers at Draghi’s press conference that will be more important than the actual rate announcement.
The market will be looking for clues as to the extent of the solidarity within the ECB on initiating any further policy action. Midweek reports this week of discord among a number of ECB members and Draghi over his stimulus push has the market nervous, ergo it craves reassurance. But will it get it?
Draghi is likely to stick to the script and highlight:
  • 1. The ECB continues to expand its balance sheet to 2012 levels.
  • 2. The bank is willing to expand the size and composite of assets it purchases.
The ECB’s third covered bond purchase program (CBPP3) is already off to a strong start. If there was a potential of any surprises from Draghi today, the market has gambled on the ECB revealing further details on its asset-backed purchase program (ABPP), and the potential for the ECB to adjust the terms (size, maturity, and premium) of the long-term refinancing operation, or TLTRO, ahead of the December 11 operation.
Due to the political quagmire within the European Union, the ECB will move to sovereign quantitative easing (QE) only as a last resort. If macro data continues to disappoint further, and if existing measures are shown to be insufficient, the eurozone will have no alternative but to introduce sovereign QE to save Draghi’s EUR at “all costs.” For now, the ECB will tinker with existing purchases and expand private sector asset purchases (corporate bonds).
Uncertain Euro Lays Low
The market remains biased to the downside for the 18-member single unit on concerns over growth, periphery debt, and ECB political gridlock. Nevertheless, the EUR (€1.2510), straddling close to multiyear lows outright, looks uncertain. Some of the short EUR positions are in danger of becoming stretched. Twice this week the EUR rallied rapidly to intraday highs (€1.2565-75) on potential ECB discord rumors and the U.S. midterm election results. The speed of the move certainly indicated the vulnerability of various positions already being taken. There is a chance that Draghi will reveal details of the ABSPP which could see purchases begin as early as next week. If so, is the market short enough of EURs heading into the meet?
If the ECB happens to fulfill market expectations, investors’ attention will immediately shift to tomorrow’s NFP release. With no ECB surprises, currency ranges should remain contained ahead of the influential American jobs report. Yesterday’s upbeat U.S. ADP National Employment Report and in-line U.S. services purchasing managers’ index (employment component increased) have probably marginally increased market expectations for the NFP number. Current consensus is looking for a gain of between +225k to +230k with the unemployment rate ticking along at +5.9%. At or above expectations will give the USD license to roam, again putting pressure on the EUR to test its weekly low (€1.2453). Through these levels, it will boost the EUR bear’s ego targeting something with a €1.2100 handle in the medium term, while EUR resistance remains close to €1.2567-75 for the time being.
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