Rates: ECB out of ammunition; over to fiscal policy
ECB President Draghi presented markets with an early goodbye present and passed the torch on to fiscal policy. The bear flattening of EMU yield curve suggests that markets take into account that the ECB is out of ammunition and that we’ve had a final rate cut. Focus turns to the US (consumer) today with retail sales and University of Michigan consumer confidence.

Currencies: ECB ‘end-game’ and the call for fiscal stimulus support euro bottoming
EUR/USD rebounded off the 1.0926 support as markets realized that the ECB has shot its last bullet. The call for more fiscal stimulus is a euro positive, too. Today, soft US retails sales might inspire some USD caution ahead of next week’s Fed meeting . EUR/USD regaining the 1.11 barrier would call off the short-term alert in EUR/USD.

The Sunrise Headlines

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  • Wall Street edged higher yesterday. Most indices are close to their all-time highs. The Nasdaq and S&P outperformed (+0.3%). Asian markets are buoyed by fresh ECB stimulus and trade optimism. Korea (+1.2%) outperforms.
  • Bloomberg reported that US president Trump would consider an interim limited trade deal in which some tariffs would be delayed/scaled back in return for commitment from China on intellectual property and farm goods purchases.
  • EU negotiator Barnier said he has yet to receive a proposal from the UK to base talks upon. Meanwhile, the DUP said it would allow North Ireland to abide by some EU rules after Brexit to replace the current backstop, the Times reported.
  • The US budget deficit widened to more than $1 trillion, or 4.4% of GDP, during the first 11 months of the fiscal year as military spending and interest expenses increased while revenues weakened.
  • CDU leader Kramp-Karrenbauer warned that Germany’s fiscal scope is narrow given the debt brake embedded in its constitution, adding that the country’s “black zero policy” remains the benchmark.
  • Acting PM Sanchez rejected the latest proposal by Podemos to form a coalition on a one-year trial period. Podemos’ suggestion was to review the coalition after a budget had been approved.
  • Today’s economic calendar puts the focus on the US with August retail sales and September University of Michigan consumer confidence. EU finance ministers meet in Helsinki.

Currencies: ECB ‘End-Game’ And The Call For Fiscal Stimulus Support Euro Bottoming

EUR/USD bottoms despite ECB easing

Yesterday’s EUR/USD moves followed the swings in sentiment around the ECB decision. EUR/USD dropped to test the low near 1.0926 after the policy announcement. The combination of a deposit rate cut and, even more, the restart of QE, initially highlighted the ECB commitment to an ultra-easy approach. However, during the press conference, Draghi stressed that fiscal stimulus now has a much bigger role to play. As did Lagarde earlier this month, he acknowledged the side-effects (and thus the limits) of policy. European yields more than reversed the initial decline and so did EUR/USD. The pair closed at 1.1065 (from 1.1010). USD/JPY extended its ‘reflation’ rally to close north of 108.

Overnight, the risk rally continued as headlines continue to suggest that the US and China are aiming for some kind of partial trade agreement. The yuan (USD/CNY 7.0785) maintains this week’s gains. USD/JPY is holding north of 108. EUR/USD stabilizes in the 1.1070 area.

Markets will still ponder the meaning of yesterday’s ECB policy decision. Headlines on the trade war suggest an ongoing constructive risk sentiment. Regarding the data, the focus turns to the US retail sales and the Michigan consumer confidence. Retails sales growth is expected slow after five strong months. A slight setback/negative surprise wouldn’t change the broader picture but might be cause some USD caution ahead of next week’s Fed policy decision. Yesterday’s market reaction (both in yields and the euro) suggest that markets assume the ECB is running out of ammunition. The focus on fiscal policy in theory is a euro positive, too. Investors also might turn a bit more cautions on the dollar ahead of next week Fed meeting. From a technical point of view, yesterday’s intraday price action solidifies the 1.0925 support area. So, we take a cautious positive bias on EUR/USD.

A return north of 1.11 would call off the ST negative alert for EUR/USD. Yesterday, there was little high profile ‘new news’ on Brexit. Trading in EUR/GBP mostly followed the ECB-driven price pattern of EUR/USD. Sterling lost some ground against a broadly stronger euro (EUR/GBP 0.8971 close) but closed little changed against the dollar. Today, there are no important data in the UK. With the news flow on Brexit gradually becoming thinner, we expect more technical trading in sterling, following the global trends the dollar and/or the euro.

EUR/USD: test of 1.0926 support rejected as Draghi pleads for fiscal stimulus


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