ECB tapers asset purchase program, euro slips versus many peers, U.S. equities rise as tax cuts appear to be on the horizon

Oct 27 • Morning Roll Call • 1525 Views • Comments Off on ECB tapers asset purchase program, euro slips versus many peers, U.S. equities rise as tax cuts appear to be on the horizon

The ECB announced on Thursday, that the key Eurozone interest rate would remain unchanged at zero percent, whilst the APP would be cut from €60b to €30b a month, beginning January 2018 for nine months. Despite this significant development, the euro fell sharply versus several peers, as despite a reduction of 50%, the taper was already priced in, due to previous forward guidance delivered by the ECB during previous meetings.

Mario Draghi then struck a dovish tone during the accompanying press conference, as he intimated that the central bank would reignite stimulus if the Eurozone economy reacted badly. On the basis that inflation at 1.5% YoY is still sluggish, this is a high probability and he gave no indication that the ECB would raise the base rate, in the short to medium term. It was this lack of clarity on any potential interest rate rise, which caused EUR/USD to slump by circa 1.3% on the day, particularly as appetite for the U.S. dollar remains bullish, with many analysts expecting the FOMC to announce a 0.25% rate rise, at the culmination of their rate setting meeting next Wednesday, whilst Friday’s YoY GDP figure is not forecast to fall significantly.

The only other economic calendar release of any significant impact for the single currency bloc was the German GfK consumer confidence reading, which marginally missed the forecast by 0.1, coming in at 10.7 for November. Eurozone equities rallied, as the euro slumped and investors reacted to the taper being longer than predicted, with any interest rate decision being indefinitely postponed.

Sterling initially came under pressure in the European session, a trade body named the CBI, reported that reported retail sales performance for October was at -36, versus a forecast of 14, a bearish reading not seen since 2009, when the U.K. was still feeling the effects of the credit crunch and the various banking crises. This collapse in retail confidence from retailers, can’t simply be dismissed as impending Brexit insecurities, it could suggest economic mismanagement by the current government. As a consumer driven society and economy, the U.K. is circa 80% dependent on consumers’ spending. With retail as the U.K.’s largest employer, if its citizens have reached peak spending capacity, as household and personal debt has also risen exponentially since 2009, then it suggests that there’s little momentum left in the economy to stimulate growth. GBP/USD ended the day down circa 0.3%.

With Janet Yellen ruling herself out of another term in office as the chair of the Fed, the appointment appears to be between two hawkish individuals. As a consequence of this development, and the Republican House approving the budget resolution, potentially ushering in tax cuts before the end of the year, bank shares rallied. Added to this development, earnings of several quoted companies met expectations, as a consequence the three main indices and the U.S. dollar rose in value. USD/CHF rose by circa 0.6%, with USD/JPY rising by approx. 0.3% and reaching the critical handle of 114.00. With reference to significant USA news events; initial jobless claims came in at 223k for the previous week, whilst continuous claims missed the forecast, by coming in at 1893k. The goods trade balance missed forecast, by registering a -$64.1 billion deficit for September.

EURO

EUR/USD crashed through S3, to close the day out down circa 1.3%, at 1.1654. EUR/GBP fell by circa 0.4% on the day to 0.8858. Versus the Aussie, kiwi, and the loonie (Canadian dollar) the euro also fell by on average 0.3%, EUR/CHF fell through S1, just short of S2, ending the day down approx. 0.6%, at 1.1628.

STERLING

GBP/USD breached S1, down approx. 0.3% on the day, at 1.3156. GBP/AUD, GBP/CHF, GBP/CAD and GBP/NZD were effectively flat on the day, resting close to the daily pivot points. GBP/JPY closed out the day down circa 0.2%, at 149.94.

U.S.DOLLAR

USD/JPY whipsawed throughout the day, initially falling by circa 0.3% in the European trading session and threatening to breach S1. Later in the New York session the currency pair reversed direction and closed the day up circa 0.3% at R1, whilst breaking up through the critical psyche handle of 114.00. USD/CHF breached R2, in direct negative correlation with EUR/USD, ending the day up approx. 0.6%, at circa 0.9974. USD/CAD rose by 0.3% on the day, ending the day’s trading sessions at approx. 1.2852.

EQUITIES AND COMMODITIES SNAPSHOT FOR OCTOBER 26th.

• DJIA closed up 0.31%.
• SPX closed up 0.13%.
• FTSE 100 closed up 0.53%.
• DAX closed up 1.39%.
• CAC closed up 1.50%.
• IBEX closed up 1.92%.

KEY ECONOMIC CALENDAR EVENTS FOR OCTOBER 27th.

• USD Gross Domestic Product (annualised) (3Q A).

• USD Core Personal Consumption Expenditure (QoQ) (3Q A).

• USD U. of Michigan Confidence (OCT F).

• USD Baker Hughes U.S. Rig Count (OCT 27).

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