ECB - wait & watch mode, Draghi could talk down Euro

FX:EURUSD   Euro / U.S. Dollar
Draghi takes center stage 45 minutes after the European Central Bank releases its latest monetary policy statement later today. Almost no one in the markets expect the ECB to move rates today. London city experts on our today’s London open finance show are quite confident that ECB would remain on a wait and watch mode, while Draghi as usual may make an attempt to talk down the Euro             . (The link to today’s Finance show titled “ Market Roundup: ECB’s next move depends on what BoE does - TipTV - https://www.youtube.com/watch?v=eoV8UddmAZk” )

No reason for the ECB to move rates or expand asset purchase program as -
  • World has not come to an end after Brexit vote. There is no evidence yet of a significant deterioration in the economy
  • Financial markets are doing well; US stocks are at record highs
  • China published upbeat Q2 GDP and monthly retail sales, industrial production figure
  • Oil prices are steady
  • Draghi would want to watch BOE and BOJ’s next move

Draghi would want to watch what the Bank of England does in August and act accordingly – Is the message that comes through from today’s Finance show.

The only big difference in the post Brexit world is that – earlier ECB had to keep an a eye on BOJ, now after Brexit ECB would have to keep an eye on BOJ and BOE.

Markets put the probability of a BOE rate cut in August at 63%. Meanwhile, a double barreled (fiscal + monetary) stimulus is expected from Japan. Whether or not BOE and BOJ/Japanese government deliver is a different debate. But for now Draghi would want to wait on the sidelines.

We may see minor tweak to the asset purchase program like – drop in the threshold for bond purchases and/or extending the maturity of asset purchase program. However, these moves are unlikely to result in a major sell-off in the common currency.

Draghi could push dovish button via comments on the post Brexit world and situation in Italian banks and European banks at large.

EUR/USD – Play the trend line

  • As of now, the pair is back above the falling trend line seen on the hourly chart, but is having a tough time holding above 1.1033 (23.6% of 1.1428-1.0911).
  • Euro’s failure to sustain above 1.1033 followed by a break below yesterday’s low of 1.0981 could yield a quick fire drop to 1.0937 (61.8% of 1.0517-1.1616) – 1.0911 (Brexit day low).
  • On the higher end, we need a daily closing above 1.1088 to signal short-term bearish invalidation.

Another view on ECB and monetary policy impact on FX markets worth watching - https://www.youtube.com/watch?v=6gk8g2D8V-Y
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