The best moves in the markets come when they are unexpected. Tonight we will examine what market participants are expecting and how close they are pulsing to reality.
It all comes down to the presser. Last time Mr. Draghi twirled bulls interest when he mentioned that deflationary pressures have been replaced by reflationary ones. What does reflation in economics mean? It simply is another term for changing money supply like QE and describing the first phase of an economic recovery, after a period of contraction. So we gather that the head of ECB does acknowledge EZ growth but like any cautious Central Banker he will seek to support the advance at all cost. What tools are at his disposal to do that? And more importantly what drives growth?
Growth drivers are retail sales, manufacturing sectors, labour market and inflation. Let’s examine each:
-Consumer confidence and retail sales are at a steady increase
-Euro zone unemployment has been dropping
-Core CPI nudged higher
-Manufacturing sector has been a bit of a mix
None of the elements above are phenomenal but are broadly good. So how is Draghi going to work with confident but fragile data? Which takes us to tomorrow’s press announcement and what market is pricing in.
Market is pricing less dovish comments from ECB and thus has been driving Euro higher in anticipation of a taper announcement in September. From what has been mentioned above, it is not logical to believe or even anticipate that Draghi will attempt to talk or hint at a taper tomorrow. His concern is ‘growth stability’ and in his endeavour to support the advance, he will reiterate his commitments to current stimulus with no end in sight. He will however address the healthy economy and pat himself and his team on the back for causing a turnaround in Euro Zone’s fortune. How will market/Algos react to the presser and wording?
We anticipate a EURUSD sell off on the back of disappointment from taper thirsty bulls. Coupled with profit taking and the first level of decent demand will be 1.1476. From there it comes down to the exact wording from Draghi, it is likely we will see the pair consolidate and eventually push higher as USD has little support.
Risk to the trade:
Draghi is nicknamed Bazooka. He might let his notorious explosive nature get in the way of rationality and send EURO to the moon. The possibility of that playing out is weak. Smart money positioning is showing us that this is not the case.
On the other hand we see a great risk to reward trade with both ECB pushed in a corner, with a too fast and too high euro. Furthermore price holding at current highs as a prime target to fall, as the only element that could carry euro higher short term is new fuel which we believe won’t be provided by tomorrows ECB Presser.
Recap:
Intial reaction is a sell into possibly 1.1476, depending how disapointing Draghi comes across. Later on we anticipate the pair to drift higher. Where we’ll have the opportunity to play both swings. Should the level get tested prior to the press anouncement we will reassess and share views on Twitter.
Good Luck To Us All
Miad
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