Mario Draghi finally accepts that risks to the Eurozone economy have shifted to the downside

US Session Forex Brief, Dec 13 – The ECB Finally Turns Dovish, but Tries to Sound Confident

Posted Thursday, December 13, 2018 by
Skerdian Meta • 4 min read

Today, we are trading normal fundamentals in forex as opposed to just trading politics and political rhetoric in the past few months such as the Brexit saga, the Italian budget rhetoric and the tariff tweets from Donald Trump. Today, we have been concentrating more on central banks for a change. First, it was the Swiss National Bank SNB that held their meeting early in the European session.

I expected the SNB to sound sort of dovish since the GDP and consumer price index CPI inflation declined by 0.3% and 0.2% respectively in Q3, as the economic report of the last few weeks have shown. But, the SNB is more worried about the CHF strength than anything else and Chairman Jordan did make a fuss about it, threatening intervention as they usually do, but the CHF didn’t take notice whatsoever. This is one of the few occasion that the CHF doesn’t respond to comments on intervention from the SNB.

Then, the European Central Bank took over the attention. They held the refinancing rates unchanged at 0.0% as expected and the deposit rate at -0.40%. The statement was little changed from the previous one, suggesting that the ECB will quit the QE programme this month, finally. ECB President Mario Draghi held a press conference 45 minutes later and although he tried not to give too much away, the market consensus is that the ECB is starting to turn dovish now, at least for the short term.

The ECB lowered their inflation and GDP expectations for 2018 and 2019, but what had the most effect on the markets was the comment that the risks have shifted to the downside. The ECB was seeing risks for the Eurozone economy as balanced until very recently, but now the rhetoric is getting more dovish and the Euro lost around 50 pips on Draghi’s comments.

The European Session

  • European Inflation  The German CPI inflation for November was expected at 0.1% and it came as expected. The French final CPI was expected to decline by 0.2% and it came at 0.2% as expected as well. The Swiss PPI (producer price index) was expected to increase by 0.1%, but it declined by 0.3% instead.
  • Brexit Rhetoric – EU’s Oettinger said early in the morning that there can’t be further negotiations regarding Brexit and all they can do now is add some clarification to the existing Brexit agreement. UK’s Brexit Secretary Barclay added that Britain will try to get legal assurance from the EU regarding the backstop. The UK and the Irish Prime Ministers met in Brussels today ahead of he EU summit. They must have spoken on the backstop. Theresa May thanked her colleagues for the support after dodging a bullet yesterday as her leadership was questioned.
  • Swiss National Bank Meeting – The SNB kept interest rates unchanged at -0.75% as expected. Although, Chairman Jordan did mention the strength in the CHF saying that it is highly valued and repeated that the SNB might intervene in the markets, probably buying EUR/CHF. The CHF should have tumbled lower but it ignored Jordan’s comments this time.
  • Chinese Economic Growth Has Neared Potential for the PBOC – This was the headline comment from the People’s Bank of China Governor Yi Gang. He added that overcapacity has eased significantly and the downward pressure is increasing.
  • OPEC Might Not Deliver on the Production Cut Promise – OPEC+ decided to cut the Oil output by 1.2 million barrels per day last week. OPEC was going to cut 800,000 while Russia was said to cut 400,000. But now we are hearing rumours that OPEC might not reach that target and only cut production by 700,000 instead. Oil prices declined more than $1 on those rumours.
  • The ECB Meeting – The European Central Bank held its meeting as well today. They kept refinancing rates unchanged at 0.0% and the deposit rates at -0.40%. The statement showed that the ECB had lowered GDP expectations at 1.9% from 2.0% this year and to 1.7% from 1.8% in 2019. Inflation expectations increased to 1.8% for 208 but were lowered for 2019 from 1.7% to 1.6%. The ECB confirmed to end the Quantitative Easing programme this month and keep interest rates unchanged through summer 2019.

The US Session

  • Mario Draghi’s Speech – The head of the European Central Bank Draghi finally accepted that the Eurozone economy is facing difficulties. He confirmed that inflation has been coming weaker than expected and the risks to the economy are now shifting to the downside, as opposed to being balanced until recently.That sent the Euro 50 pips lower.
  • Canadian New Housing Price Index The price index for new houses remained unchanged at 0.0% in November, but increased to 0.1% on an annualized basis as expected, down from 0.2% previously.
  • US Import Prices – Import prices have been increasing by 0.5% in September and October, but were expected to decline by 1.0% in November. Today’s report showed that the price of imports declined by 1.6%. I suggest lower Oil prices have had some impact, but the US produces a lot of the Oil it uses by itself.
  • US Unemployment Claims –  Unemployment claims used to be in the 200-210k region until several months ago, but they kept increasing and in the last few months we have seen them get to the 230k region. Today they were expected to decline to 226k, but instead they fell further to 206k, which puts them at their previous range.

Trades in Sight

Bearish GBP/USD

  1. The trend has been bearish for GBP/USD for weeks
  2. The retrace higher looks complete on the H4 chart
  3. The 50 SMA provided resistance
  4. The Previous candlestick formed a doji

The 50 SMA provided solid resistance today

I was thinking of selling GBP/USD earlier today as this pair was finding resistance at the 50 SMA. The trend has been bearish for a long time for this pair and the retrace higher was complete since stochastic was overbought. The previous H4 candlestick  formed a doji which is a reversing signal after the retrace, so everything was sett for a bearish reversal. But, Brexit comments keep coming nonstop and they have burnt us a few times recently so we decided to stay out, although the setup is still  pointing down so the selling opportunity is still valid for those who like to go short. The minimum target is around 100 pips for a sell trade here.

In Conclusion

The ECB turned slightly dovish today which hurt the Euro, but the downtrend hasn’t resumed yet for this currency. The market sentiment is positive as USD/JPY moves higher while Gold is being battered today. The economic data is pretty light during the US session, so I don’t expect much action in the coming hours.

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