EUR awaits European Central Bank fallout

My EUR/USD short from $1.2714 on October 22nd is working in the right direction and has firmly broken below the key $1.2501 area.

ECB fallout
Source: Bloomberg

The key driver now for EUR/USD, to trade through bids seen between $1.2475 to $1.2460, will be tonight’s ECB meeting and subsequent press conference 45 minutes later at 00.30am (AEDT). There seems to be an internal war going on within the ECB, with a number of Mario Draghi’s major initiatives finding increasing resistance from the more hawkish contingent of the board. Notably, the fact that Mr Draghi has talked about targeting specific levels for the ECB’s balance sheet has been the key issue.

There is a varied playbook by which the EUR can be influenced by ECB actions and rhetoric, but my central case is that the possibility of QE (i.e. buying of government bonds) has increased somewhat and that it is something it could look at if the situation arises. We should also see further clarity on expanding its balance sheet.  However, on this point, if the ECB back off from talking about specific levels, then the market could take this as a EUR positive.

On the subject of inflation, it’s worth pointing out that the swaps market is pricing inflation to average 1.84% over the coming five years, which of course is well below the ECB’s 2% target.  It’s likely, therefore, that the ECB stress the increased risk that inflation stays long for a protracted period of time.

There is some market speculation that the ECB could also make the upcoming Targeted Long-term Refinancing Operation (in December) cheaper for banks (i.e. lower the rate charged to banks to 10 basis points or 0.1%) but the probability of this would be around 20% in my opinion.

The key risks for my short EUR/USD idea comes if the central bank state that the barriers to a full blown QE program are very high (which, of course, they are), while throwing some doubt on whether they can actually expand its balance sheet.

US set to announce further job rises

I looked at short USD/JPY trades from ¥113 as well and clearly this trade hasn’t worked out and the pair has traded through my stop at ¥113.30 for a 30 point loss. Upside momentum is strong with the market now pricing in an encouraging US jobs report on Friday, after last night’s ADP report.

Employment expected to rise domestically

Short AUD/USD trades look good in my opinion from a purely technical perceptive, although on the hourly chart we are seeing a slight move higher and I would be looking more closely at working sell orders into 0.8640 (the 38.2% retracement of the 0.8762 to 0.8565 move).

The downside break of the recent consolidation pattern on the daily chart and strong horizontal support (seen between 0.8660 to 0.8640) suggests a move to 0.8370 and the bottom of the channel (as seen on the attached chart).

Today’s Aussie employment data at 11.30am (AEDT) is the key release and a good number here could see a spike, in which case my suggested entry would come into play. The market is expecting 20,000 jobs to be created (the economist range is 35,000 to zero jobs). However, the number to all intents and purposes is a lottery and could come out anywhere. Still, despite massive scepticism about the data the market will still act so it’s certainly an event risk.

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