Euro rallies as ECB runs out of ammo, pound higher, equities flattish

Morning Note

The rate of change in expectations for ECB monetary policy has altered course. 

The bulls just failed to push the S&P 500 over the line yesterday but we could be on for it today. We topped out at 3,020 and the bulls lost interest later in the session, closing at 3,009. Futures suggest a slightly positive open – bulls will be looking to force the all-time high today, chasing 3,027.98 intraday, and a close above 3,025.86. 

Mixed messages on trade, try to ignore the noise – a deal is a long way off. Trump says he would consider an interim deal – maybe, maybe not, you just don’t know what’s truth amid all the fake news. 

We sense a bit of disappointment after the ECB despite the QE ad infinitum – Draghi delivered in many ways but it’s just increasingly clear the ECB is out of ammunition. For me Draghi delivered all he could with a last blitz of stimulus in a kind of Butch Cassidy and the Sundance Kid type finale.

It’s clear the ECB cannot just keep cutting rates – the baton will have to be passed sooner or later. Having taken some time to digest the impact of the ECB decision, this would appear positive for the euro – as we’ve talked about before, it’s the rate of change of expectations for monetary policy, not the pace of change in the monetary policy itself, that really drives currencies. And in this sense, it seems expectations have materially altered course as markets accept that there is no more ammo left. Catching a falling knife it may be, and we caution that this is very early days indeed, but the euro may be in the nascent stages of a long-term rally.

Draghi again called for structural reforms. And whilst he admitted the mildly expansionary fiscal stance in Europe right now is mildly supportive, nation states need to do an awful lot more. Fiscal reforms are a must, but in highlighting this it simply shows the ECB cannot do it alone. The statement was very dovish, but Draghi didn’t back it up enough in the press conference.  

The euro has rallied with EURUSD breaking resistance at 1.11. Bulls need to look at the 1.1150 late August swing high, but first the 50-day moving average will come into play and could cap gains. We’ve now seen EURUSD touch 1.09250 twice this month and bounce quite hard, yet the long-term downward trend remains the dominant force – but for how long? If the market thinks the ECB really now has run out of ammo, we could see a rally for the euro.  The September 3rd candle is a clear bullish hammer reversal and the lows tested then have again been rejected on the day of the reckoning itself and the descending narrowing wedge completes. This would chime with the sense that the rising wedge on the dollar index suggests we’re entering the top of the dollar rally. 

Asia has been broadly higher. European equity markets are flattish and looking for a bit of direction, but at send time the majors were in the green, save for London.   

The FTSE 100 is now in a dance with the 50-day line around 7336. We look for a close above this for bulls to be in charge and try to force 7400. However, sterling strength on the open may scupper any chance today. 

The pound rallied hard in early trading with GBPUSD breaking north of 1.24. Having cleared resistance at 1.2380, as long as this holds today there is reasonably clear path to 1.2520.