Euro May Weaken vs. Dollar, Yen if ECB Falls Short on Stimulus Clues

DailyFX

The Euro may weaken against the safe-haven US Dollar and Japanese Yen if a lack of guidance on future stimulus from the ECB sparks risk aversion.

Talking Points

  • ECB Rate Decision May Dent Sentiment if Stimulus Guidance is Absent
  • Bank of England Policy Announcement Likely to be Another Non-Event
  • September Fed Meeting Minutes Sought for Details on QE3 Mechanics
  • Dollar, Yen Rise as US Economic Data Drivers Recovery in Risk Appetite

All eyes are on the ECB monetary policy announcement. As we discussed in our weekly Euro forecast, the path of least resistance appears to favor an “on-hold” outcome. The spike in CPI and PPI inflation in September reinforces the likelihood of such a scenario. That suggests that the Euro is unlikely to find lasting yield-driven support in the announcement’s aftermath. This opens the door for the sentiment-linked implications of the rate decision to take center stage.

The growth slump in the Eurozone – which cumulatively accounts for close to a quarter of total global output – represents the most significant headwind to worldwide growth this year. That means traders will be keen to see Mario Draghi and company offer any guidance on forthcoming growth-supportive measures. The absence of anything along these lines may prove weigh on risk appetite, weighing on the single currency against havens including the US Dollar and the Yen (though gains may materialize against more overtly risk-linked counterparts like the Aussie and Kiwi Dollars).

The Bank of England is likewise due to issue a monetary policy announcement, but this seems likely to be another non-event as policymakers wait to assess the impact of the latest QE expansion and the new FLS scheme. Later in the day, the spotlight shifts to the Federal Reserve as it releases minutes from September’s FOMC meeting. Markets will scour the report in an attempt to establish the precise triggers for the Fed’s launch of QE3 and glean any insight on what conditions will need to be met for the program to be wound down.

The US Dollar and Japanese Yen sold off overnight as risk appetite firmed across Asian bourses following a supportive set of US economic data, denting demand for the go-to haven currencies. Figures from ADP showed the US private sector added 162,000 jobs in September, topping expectations for a 140,000 increase. Meanwhile, the ISM Non-Manufacturing Composite gauge revealed that service-sector activity unexpectedly accelerated, growing at the fastest pace in six months. The reports helped buoy hopes that a firming recovery in the US will help offset a recession in Europe.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

1:30

AUD

Building Approvals (MoM) (AUG)

6.4%

4.7%

-21.2% (R-)

1:30

AUD

Building Approvals (YoY) (AUG)

-15.4%

-14.3%

-10.6%

1:30

AUD

Retail Sales s.a. (MoM) (AUG)

0.2%

0.4%

-0.8%

Euro Session: What to Expect

GMT

CCY

EVENT

EXP/ACT

PREV

IMPACT

7:00

GBP

Halifax House Price sa (MoM) (SEP)

-0.4% (A)

-0.5%

Medium

7:00

GBP

Halifax House Price (3M/Y) (SEP)

-1.2% (A)

-0.9%

Medium

7:15

CHF

Industrial Production (YoY) (2Q)

4.6% (A)

1.4%

Medium

11:00

GBP

BOE Asset Purchase Target (OCT)

375B

375B

High

11:00

GBP

Bank of England Rate Decision (OCT 4)

0.50%

0.50%

High

11:30

USD

Challenger Job Cuts (YoY) (SEP)

-

-36.9%

Low

11:45

EUR

European Central Bank Rate Decision (OCT 4)

0.75%

0.75%

High

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.2877

1.3025

GBPUSD

1.6048

1.6170

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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