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EU Market Outlook - ECB Sets Itself Up To Be Hero Or Zero

Last updated 8/2/2012 1:20 AM EST (GMT -5) 2 Comments

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Andrew Taylor

Market Strategist, GFT

Follow @ATaylor_GFT

Top Headlines

o    FOMC delivers as expected and remains firm

o    ECB meeting main event risk ahead > Pressure to deliver

o    AU Trade Balance & Retail Sales Data surprises on both counts

o    Market Moves:

•    EUR and AUD off slightly post FOMC meeting

•    Asian equities mixed on low volume trade ahead of ECB meeting

•    Precious Metals and Copper meet resistance post FOMC meeting

US markets provided the considerable action overnight as the Federal Reserve held firm on its monetary policy stance. The markets by and large had this result factored in, although ‘selling on fact’ saw equities, commodities and risk currencies move lower.

Chatter quickly returned to today’s ECB meeting where the market is in no mood for disappointment. The last few days have given traders time to question their optimistic positions based on President Draghi’s comments last week. This has the market feeling that the ECB owes them the result that they have bought into and anything less will be a betrayal of their trust.

Australia showed a strong surprise in its retail sales figures for June coming in at 1.0% beating the 0.7% the market had forecast. This rise will be short lived as it is a direct reflection of government handouts delivered at the time to boost spending to which it succeeded in doing. Australia also managed to beat Trade Balance expectations convincingly as it posted a A$ 9M surplus against a A$347 deficit forecast. Exports were expected to be the damaging side of the ledger when in fact it held up nicely amidst weakening commodity prices and perceived slowing demand. This will boost sentiment for the economy as it proves resilient to economic woes that are happening around them.

Outlook

In the lead up to the FOMC meeting, markets managed to reignite another round of risk asset buying in anticipation of action being taken. This is likely to happen again before the ECB announcement which will provide good selling opportunities as the price approaches proven resistance levels. On release the ECB will need to beat the market’s expectations to push higher, something that is possible but not probable. If the ECB delivers as expected then the markets may see a brief cheer rally before profit taking and realities reclaim its rightful ownership.

Economic Events to watch:

0830 UK     Jul CIPS Construction PMI

0900 EU     Jun PPI

1100 UK     Aug UK interest rate decision

1130 US     Jul Challenger Job-Cut Report

1145 EU      EU interest rate announcement

1230 EU      ECB President Draghi Speech

1230 US     Jul 28 Initial Jobless Claims

1345 US     Jul ISM-NY Report on Business

1400 US     Jun Factory Orders

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Comments (2)

Darkdoji

August 02, 2012 at 04:13 AM ET

"If the ECB delivers as expected then the markets may see a brief cheer rally before profit taking and realities reclaim its rightful ownership". A cliched interpretation of the market no doubt and if one that the math disputes fundamentally at least in the case of AUD. The flaw of course is in discredited assumption by fundamentalists that trades are based on fundamental reasoning - which is a huge laugh. In the case of AUDUSD and especially AUDJPY, if Draghi delivers then the math suggests a 24 lane highway (freeway I understand americans call it - never been) to 84.393 in the case of the latter. So for me the analysts conclusion is in fact the "something that is possible but not probable" - based of course on the math. For instance both pairs I mention are exposed in +ve deviated volatility envelopes in rising channels with no resistance ahead until clearly defined targets in the weekly (the AUD should hit some turbulence though shortly after this takeoff but at an amplitude not comprehended by the analyst). But helpful reporting all the same.

Darkdoji

August 02, 2012 at 12:35 PM ET

Drahgi did not deliver and so we are headed back south. But I think Dgrahi will follow through - what is amusing is this - "I'm really surprised at the amount of attention my remarks last week received in the press,"MD - if in fact he was he should have come out with a clarification b4 now. Seems to me that he did this deliberately to precipitate what is now evident - market pressure and then force the politicians to come around. I can't complain since I read the situation well rode north with the hopefuls from last night as much I could getting out at (GMT+1, 1.25 PM) thanks to Neal's Friday piece and yours today and now riding south driven by the turn of events which ride should prove more durable and less volatile.

When I pull out depends on what I read before NFRs tomorrow - the regression model has been busy recalculating to fit each new zero candle and updating the predicted vector. But so far I do not see tomorrow just more space in current direction (less so for AUD and its crosses). But of course the NFRs will be more important now and what all this means I am sure will be out here before long. Feels good to "see" and now "hear" the market.

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About The Author

Andrew Taylor's financial markets career started in 1991 in the interbank FX market,where he worked for one of the largest banks in Australia. Andrew then went on to trade on behalf of some of the biggest global banks, working across five of the world's major financial hubs: Sydney, New York, Singapore, Auckland, and Tokyo.

His more than 20 years of experience spans market borders and asset classes, covering global equities, commodities, options and futures. Andrew's wealth of trading experience and ability to communicate with traders of all levels has put him in demand as a first point of contact for clients and the media alike when seeking information and guidance.