ECB is on the scene again

The Chinese block of data on Monday morning turned out, in general, as positive for the Asian market, stock markets and oil prices
Last week, statements made by leaders and financial analysts tried to feel out basic price levels of main assets; however they did not manage to break the general sentiment for dollar strengthening. The interest shifted to the current week - to main fundamental goals: ECB and FRS rates. Last week's information realm could be additionally noted for the publication of the Beige book. That is not simply a financial report, but rather a description of the general condition of regional economy. Let's note the main indicators only:

  • The official index of consumer prices is below that predicted in the previous "book";
  • The net volume of purchases of American papers by foreigners (national debt and corporate papers) - the falldown is significant, which fits well the framework of the general tendency;
  • The demand of foreign investors for US treasury papers is actively declining;
  • Consumer spending of the largest areas (including New York) are actively declining;
  • Retail sales are growing in administrative centers and decline in industrial areas;
  • Uncertainty regarding stability of replenishing of the federal budget creates difficulties in planning defense industry in the near-term and mid-term perspectives.

In order to improve this picture, we don't need strong dollar, it complicates the economy and irritates the interests of large businesses; and therefore, the "greenback" traditionally declines after publications. We should come back to the study of this qualitative assessment of the American economy and market response before the next FRS meeting. The reference point of this week is ECB meeting, where, as usual, the general tone of Draghis's speech will be the main issue since no real steps are expected for now. Large banks, with the assistance of rating agencies, rely on expansion of European QE in case the fever raging in the Chinese economy continues - a further decrease of ECB rates; in case of serious plans in the monetary policy, the basic issues are to be discussed during the intermediate meeting - it took place on October 6, and by its results, no decisive measures have been announced.

The upcoming meeting, at least, will discuss adoption of additional measures for stimulation of inflation and economy growth, since real inflation and general indicators for now are much below ECB goals. Discussion of those issues, regardless of the results, will put pressure on EUR/USD. ECB has few opportunities in store for improvement of the perspectives of economy and inflation growth; so we will confine ourselves to a general assessment:

Extension of dates for QE program. Today, extension of monthly volume of redemption of state treasury bills of Eurozone countries is unavailable because of ECB mandate. Redemption can be increased due to redemption of other assets; however, there are almost no such assets left (the advertised ABS program has failed). If assets are found (for example, mortgage bonds), they will cause only capital inflow in euros, which can weaken it, but it will not resolve the global problem. The nearest date, when Draghi could declare about expansion of QE dates, is December; however, that, in any case, is too early, while the Central Bank has only verbal intervention in its possession.

Increase of ECB inflation goal from the level below 2% to stable 2% or above. That is quite possible since it is required for prevention of euro growth in case of emergence of expectations of ECB rate increase under possible growth of oil prices. However, it is all premature now, in any case. If, by the date of the meeting, oil prices grow at least by several dollars, and euro falls to 1.1250-1.12, then Draghi can restrict himself to comments on general uncertainty in the stability of inflation decline effect.

"Question - answer" block. Draghi can quite relieve Greece's access to the ECB's benefits by way of discussion. Greece has already adopted a package of preliminary austerity measures, which, potentially, can lead to resumption of acceptance of Greek state treasury bills on security of ECB and access of Greek banks to participation in the QE program. It can turn out as short-term positive for euro. After ECB, regardless of the results and formed price levels, the attention of the market will concentrate at the FRS meeting on October 28.

There is practically no serious news next week. The Chinese block of data on Monday morning turned out, in general, as positive for the Asian market, stock markets and oil prices. Last week's reports on US assets didn't quite satisfy, and the market supports the perspective of delaying FRS rate increase for later dates. Only PMI report on Friday is worth of out attention. It can reverse euro after the ECB meeting. As soon as Chinese statistics published on Monday morning turned out above that expected, FRS officials' statements became more aggressive (we should turn our attention to Yellen on Tuesday). In general, their opinions didn't change but became much more moderate regarding dates.

Euro closed the week below the key level of trend reversal going up. The relevant range for EUR/USD - 1.1353-1.1427, level 1.1360 has been relevant up till now, price penetration downward hold onto the support on mark 1.1310, because strong support levels 1.1278-1.1267 and 1.1232-1.1223 are located below. A serious penetration upward is possible under penetration of 1.1400-1.1410. Work area for GBP/USD: resistance - 1.5450-1.5500 (large options strike - 21.10.15), support - 1.5390-1.5350.

Author: Alexander Ward,
ForexChief Currency strategist