ECB delivers as trade truce speculated

EUR rose on speculated trade truce

The wavering of the market given the uncertainties of the extent of support the ECB would deliver this week came to an end with the 10-basis point cut to deposit rate to -0.5%, tiered reserves system and the restart of quantitative easing (QE) from November. While the rate cut had been within expectations, there had certainly been some contemplation over the extent of the QE. Both the early start date from November 1 and the open-ended end for ‘as long as necessary’ had perhaps been a pleasant relief in light of the concerns over the euro area’s economic health. ECB president Mario Draghi’s swan song at the helm had been the gift of looser monetary conditions for the euro area, though it remains to be seen if this is adequate to reflate the eurozone as the focus shifts towards fiscal policy with the handover to his successor Christine Lagarde.

For EUR/USD which had been particularly sensitive towards the chatters around monetary policy in the lead up to the ECB meeting, prices had notably slipped towards last week’s lows for the year with the array of measures announced. That said, this was before the currency pair sharply reversed with reports suggesting a trade truce between US and China. For what it is worth, President Donald Trump had also remarked that he would consider an interim trade deal though preferring a lasting one. Such a scenario is expected to serve as a support for markets in the near to medium term amid the uncertainties, though this would hardly be equated to a quick step towards resolution.

EUR/USD can be seen jumping on the positive turn in sentiment, mostly with the greenback itself declining on the improvement in risk sentiment. With this jump, EUR/USD is now pushing at the downtrend resistance, one to watch for a break here for a reversal in trend particularly if there should be a carry through of the impact towards economic conditions.

Source: IG Charts

Pressure on the Fed

With the series of improvement in US-China trade rhetoric and the latest murmurs of an interim trade deal, alongside the latest jump in US CPI data, it will be one to consider how the Fed will shape the forward guidance next week. US core CPI reading surprised at 0.3% month-on-month (MoM) while headline CPI came in line with consensus at 0.1%. As far as the bond market is suggesting with US 10-year yield edging higher, it does appear that the impetus for the Fed to continue cutting rates have slightly diminished thus far.

Yesterday: S&P 500 +0.29%; DJIA +0.17%; DAX +0.41%; FTSE +0.09%