Euro whipsaws in wide ranges after the ECB’s confusing signals, USA equity markets fall as FOMC interest rate bets fade
The euro experienced whipsawing price-action versus its peers during the afternoon sessions as the ECB announced its rate setting decision and outlined a new direction in terms of forward guidance. Rather than announce an interest rate cut in the short-term, the ECB and the President Mario Draghi surprised FX analysts and analysts as they suggested that any rate could would be most likely held off until quarter two 2020 and that they’ll monitor the usual factors of: GDP growth, employment and inflation before escalating the current TLTRO III programme.
The ECB’s revised monetary policy took FX market participants by surprise creating whipsawing price-action in many pairs which proved tricky to trade during the afternoon session. EUR/USD traded in a wide, daily-range, oscillating between initial bearish and final bullish sentiment towards the end of Thursday’s trading. At 20:52pm U.K. time the major pair traded at 1.114 up 0.04%. Perhaps the cleanest movement for a euro pair was demonstrated by EUR/CHF; trading initially below the daily pivot-point the cross-pair broke to the upside as the ECB policy was broadcast, breaching the third level of resistance, R3, to trade up 0.68%. Germany’s DAX closed down -1.33%, the various German IFO metrics missing the forecasts dented equity market sentiment across wider Europe, as did the new forward guidance the ECB announced.
Good economic news in the form of retail sales and unemployment claims for the USA, dented many investors and traders belief that the FOMC was odds on to announce a cut in the key interest rate by at least 25bps on July 31st. New orders for U.S. manufactured durable goods jumped by 2% in June, the largest growth since August 2018 and reversing the -2.3% slump in May, while beating market expectations of a 0.7% growth by some distance. Demand for machinery increased the most in nearly 18 months; transport equipment orders rose sharply, mainly civilian aircraft, motor vehicles and parts.
The latest weekly and continuous unemployment claims also receded, Thursday’s better than anticipated economic data caused U.S. equity investors to reduce their faith in the FOMC cutting the rate next week, consequently the USA equity markets sold off as cheaper corporate debt is less likely to be forthcoming. The SPX closed down -0.51% and the NASDAQ 100 closed down -1.01%. At 21:15pm U.K. time the dollar index, DXY, traded up 0.07% at 97.80 maintaining a 1.60% monthly rise.
Focus on Friday July 26th will mainly concentrate on the latest GDP growth figures for the USA to be published by the BEA statistics agency at 13:30pm U.K. time. Both Bloomberg and Reuters news agencies expect a reading of 1.8% for Q2 annually to be revealed, falling from 3.1% for Q1. How the markets for both USA equities and the U.S. dollar react, will depend on whether the estimate is priced in. Such a low reading (if met) may encourage the FOMC to reduce the key interest rate below its current 2.5% level, therefore, counter-intuitively a poor GDP reading could be bullish for equities and bearish for USD.
At 21:30 pm on Thursday USD/JPY traded up 0.42% and USD/CHF traded up 0.63% as the traditional safe-haven currencies gave way to the appeal of the globe’s reserve currency. GBP/USD traded down -0.24% at 1.245 as price neared S1. EUR/GBP initially traded close to S1, but as euro sentiment reversed after the ECB broadcast, the cross-pair traded close to R1 and up 0.30% on the day.
Sterling failed to make significant gains versus any peers as the U.K. parliament session formally ended on Thursday, but not before new prime minister Johnson delivered a bizarre, random speech in the House of Commons threatening the E.U. with a no-deal exit and in an instant destroying any goodwill Theresa May had built up with her European counterparts.
« If the forecast for USA GDP is met then the FOMC could react next week by slashing the key interest rate to 2.00% Focus turns to the latest Q2 GDP growth figures for the USA for clues as to the direction the FOMC monetary policy will take. »