No reason for the ECB to move rates or expand asset purchase program as -
- Bond yields are at record lows, 10-yr German bund yield is negative
- 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
- From technical perspective, the EUR/USD pair is heading into the ECB event on a weaker footing, courtesy of price action as discussed here - EUR/USD prepared for a break below 1.10 and here - EUR/USD eyes 1.0940
- As of now, the pair is back above the falling 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 invalidation.
Another view on ECB and impact on FX markets worth watching - https://www.youtube.com/watch?v=6gk8g2D8V-Y