A Chinese holiday today has spared the market further ructions from the Middle Kingdom which is a good thing as there are bigger fish to fry heading in to the end of the week. On the menu is the ECB press conference later today and then the main course on Friday will be the US labour market report. Both events are highly significant as news from the 2 still most important economic blocs in the world could impact risk sentiment for some time to come.
With regards to the ECB press conference, analysts don’t really expect any immediate policy movement, and in my view the recent data coming out of the Eurozone has been reasonable. Still, collapsing commodity prices, the recent market volatility and the consequential rally of the euro are all issues that will have been monitored closely by Mario Draghi and his colleagues. Given the narrative that the ECB president set forth to justify quantitative easing at the start of the year, it is by no means a stretch to expect some comments about what the ECB might do if inflation continues to dip. As I’ve pointed out before this is quite a difference in comparison to the stance taken by both the Federal Reserve and Bank of England which both tend to prefer to look through the transient effects of falling commodity prices. In any case we all know that deflation narratives are just a proxy in the ongoing currency wars that are being played out in living colour. We will report back if anything comes of the press conference, and if it’s really juicy expect some tweets.
Equity markets certainly look like they’re trying to recover again, yesterday’s moves almost regained all of the prior days losses, and it’s possible that yesterday’s lows will have set up a new secondary reaction low which will confirm a mini-trend. From a technical perspective if that low holds for the next few days we can start talking about higher lows, and hopefully higher highs. As you’ll know from blogs earlier this week, I do expect this market to rally, and with it the US dollar should also continue to rally. Based on the monthly technicals I reviewed a few days ago, I continue to expect the euro to outperform the pound sterling over the next few weeks, perhaps months, and I similarly believe that we have seen a major low in the oil price that is likely to hold at least for the rest of the year. Some of these points should be positives for emerging market currencies, after having suffered greatly in the recent bout of volatility, but the elephant in the room remains a rise in interest rates in the United States. That could exert tremendous pressure on more risky currencies and perhaps is one of the reasons considered by the IMF which is warning major economies (read US and UK) to reconsider rate rises. I have my doubts about the IMF’s ability to influence monetary policy in developing countries not to talk of 2 such advanced nations. The bottom line is that we should expect much more calm in the market place today.
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