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Equity traders decided that the ECB’s comments indicated that the current September date for the end of their QE programme was now likely to be extended. Not only had a sizeable amount of the anticipated QE boost to sentiment been eroded by the troubles surrounding Greece earlier in the year, but these weaker growth and inflation expectations had been compiled before Black Monday, suggesting that things will get worse before they get better.
Once again the markets have decided that this bad news was going to trigger further ECB action and was thus good news. Mario Draghi’s “whatever it takes” tag line still carries credibility with investors, even if they would have preferred a more explicit commitment.
Somewhat less credible are the previous statements from the Bank of England and chancellor George Osborne that slowing growth for China would have only a mild effect on the UK economy; yesterday’s figures out of the eurozone showed that is unlikely. UK exposure to China may be small relative to Germany, but the economic consequences will not stop at the Channel coast.
Although institutional consensus still points towards a September start date for the US to start raising interest rates, this has been undermined by recent volatility and downturns in wage growth numbers. As a result, there has been a discernible number of firms now shifting their call on the first rise to December.
Today’s job figures are unlikely to be able to confirm a September start date but they do have the ability to write off September and leave December as the only candidate for a 2015 hike. If last month’s job growth does undershoot expectations then an immediate bounce in EUR/USD is distinctly likely as traders look to recover some of the ground lost yesterday.