A twofer European Central Bank preview

Bruno Cirelli
Luglio 20, 2017

"Most sensible commentary is rightly pointing out it's doubtful Draghi will deliver anything tangible in terms of a tapering tomorrow", said Richard Franulovich, senior currency strategist at Westpac Banking Corp in NY, referring to ECB President Mario Draghi.

Developed-world sovereign bond markets were little changed for the most part, as investors waited on policy decisions and announcements from the Bank of Japan and the European Central Bank the next day. The euro is likely to find support around 0.86 against the pound and 1.43 against the loonie.

Reversing from an early high of 129.54 against the yen, the euro weakened to a 2-day low of 129.00.

'Both figures have been on a downward trend for most of this year after being on strong upward trends since 2011. If they express optimism and the pair breaks higher, the next level to watch is the 2015 high of 1.1712.

"European markets failed to capitalise on last week's rally, hamstrung by euro strength, so the hope for this particular crowded trade is that Mario Draghi will row back on the change in language from earlier in the month".

The Dow Jones gained 66 points or 0.31% to close Wednesday at 21,640, while the S&P 500 closed the session up 0.54%, and the Nasdaq rose 0.64% to 6,385.

After reporting an unexpected decline in new residential construction in the U.S.in the previous month, the Commerce Department released a report on Wednesday showing housing starts rebounded by more than expected in the month of June. This morning the Energy Information Administration announced United States oil inventories fell by 4.7 million barrels for the week ended July 14.

Finally, for Deutsche Bank's experts the need for clarity is more urgent having opened a conversation on exit. The Canadian dollar was trading at C$1.2590 to the greenback, or 79.46 USA cents, up 0.3 percent. The Australian dollar strengthened against U.S. dollar on Wednesday as oil prices rose and the greenback remained on the back foot on worries about the prospects for the Trump administration's economic agenda.

The U.S. currency was also hurt by the disappointment that U.S. healthcare bills appear to be falling apart in Congress, undermining the prospects for President Donald Trump's mooted stimulus and infrastructure-building plans.

Fawad Razaqzada, market analyst at Forex.com said: "The cable took its sweet time but last week finally cleared a major hurdle when it closed above the 1.3000-1.3050 resistance area where it had struggled in the past".

The Governing Council, led by Draghi, is widely expected to keep all its three interest rates unchanged for an eleventh consecutive policy session on Thursday, and retain its asset purchases that are set to run until the end of the year. The German DAX inched up 0.2%, France's CAC 40 index advanced 0.8% and the UK's FTSE 100 added 0.6%.

The euro has strengthened dramatically against the dollar in recent months, now sitting at around 1.1523 - and Mr Draghi could push the eurozone currency higher. The biggest buyers of Treasury notes and bonds were "All Others" with $10.2 billion, followed by China at $10.0 billion, and the Cayman Islands at $9.3 billion. Today's June estimates, with annual inflation of consumer prices at 1.3% and core inflation at 1.1%, clearly show that the European Central Bank is in no hurry to pull back, and should rather continue its asset purchasing programme beyond the current time frame of December 2017.

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