Here’s How to Trade the Sept ECB Rate Decision


The European Central Bank’s monetary policy announcement is the most important event risk on the calendar this week. Aside from the rate decision, the central bank also releases its latest economic projections which helps to shape future policy plans.  ECB President Draghi is expected to remind investors that inflation is low, the economy is weak and easier monetary policy may be needed. Consumer spending has been particularly soft, manufacturing and trade activity took a hit after Brexit and most importantly, inflation remains well below target with year over year core CPI growth slipping to 0.8% from 0.9% in August. However there have also been areas of improvement namely in business confidence, German spending and German stocks.  Some are hoping for more QE but at most we expect the ECB to extend its asset purchase program beyond March 2017.

As usual the EUR/USD there will be different phases to the currency pair’s post ECB reaction.  First, if there is no new QE, EUR/USD will jump. Then the second and more sustained reaction of the day will depend on the ECB’s guidance and their staff forecasts – most likely these will be dovish which means weakness for the euro. However if there is no QE and Draghi stresses that they are in wait and see mode, the gains in EUR/USD will be sustained and of course if there is new QE, EUR/USD will drop to 1.11.


Will Aug NFPs Help or Hurt USD/JPY?


The focus now shifts to the U.S. dollar.  Non-farm payrolls are scheduled for release tomorrow and ahead of this key event there was very little consistency in the performance of the dollar.  The greenback traded lower against JPY, AUD, NZD and CAD but moved higher versus EUR, GBP and CHF.  After the strong increase in June, there’s no doubt that job growth slowed in July and the big question is by how much. Economists are currently calling for job growth around 180K and any reading greater than 200K will be positive for the dollar as long as the unemployment rate improves and average hourly earnings rise as expected.  Any miss in the headline or underlying components will send the dollar tumbling lower.

While the leading indicators for non-farm payrolls point to a decline, the number may not be that bad.  The 4 week moving average of jobless claims declined, continuing claims are lower, Challenger Grey and Christmas reported a sharp drop in job cuts and corporate payrolls increased slightly according to ADP.  Although the employment component of non-manufacturing and manufacturing ISM declined, the dip was small and consistent with the drop in payrolls already forecasted. Consumer confidence is also down marginally according to the Conference Board’s survey, leaving the only major deterioration reported by the University of Michigan.  There’s no doubt that the U.S. economy is outperforming its peers, which should make U.S. assets and the U.S. dollar more attractive in comparison.  For these reasons and the fact that Japan’s big event risks are over, we anticipate a stronger recovery in USD/JPY.


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