EUR/USD: Investors shrugged off Catalonia crisis and focus on ECB
EUR/USD: Investors shrugged off Catalonia crisis and focus on ECB Macroeconomic overview:
- The Federal Reserve said the pace of growth in the U.S. was “split between modest and moderate” in its latest snapshot of the economy known as the Beige Book. The report covers August 29 to October 6.
- A stable economy and the tightest labor market in years, however, did little to move the needle on inflation. The Fed characterized the increase in wages and the cost of materials as “modest.”
- Spain’s central government said on Thursday it would suspend Catalonia’s autonomy and impose direct rule after the region’s leader threatened to go ahead with a formal declaration of independence if Madrid refused to hold talks. The euro climbed to a one-week high on Thursday as investors shrugged off political uncertainty emerging from Spain before a central bank meeting next week where policymakers are expected to reveal plans to unwind their multi-year stimulus policies.
- The European Central Bank is widely expected to announce the bulk of its tapering decision next week. Inflation remains stubbornly below target, but solid and broadening economic growth is increasing the central bank’s confidence that underlying price pressure will eventually embark on a clearer recovery. Over the last few days, several speeches have provided important hints about the Governing Council discussion at the upcoming policy meeting. We think that within the current QE parameters, the Governing Council could decide to spread the residual firepower over a longer period of time and at a slower monthly pace.
- We expect net asset purchases to be carried out at a monthly pace of EUR 30bn from January to the end of 2018. This should be more in line with ECB chief economist Peter Praet’s statement that, under more-normal market conditions, the purchases can be executed over a more extended time interval (as opposed to being frontloaded) because investors have become “more patient”. Given that the last two purchase windows have been of six and nine months, the next step could well be of twelve months – if not, it should be at least nine months.
- Risks to the above-mentioned scenario remain tilted towards lower purchases, mainly due to scarcity issues. Unsurprisingly, the latest ECB speeches continue to indicate that there is no appetite for changes to any of the key parameters of the program. This makes self-imposed limits a binding constraint over the course of 2018. Our estimate of EUR 360bn in net asset purchases next year assumes that the ECB would be able to meaningfully step up purchases of German state bonds, which, however, is a rather illiquid market. If the ECB does not feel confident that will be possible, it would have to settle for a smaller dose of additional QE.
Technical analysis and trading signals:
- Long lower shadow on yesterday’s candlestick, the rebound above the neckline of head-and-shoulders pattern and today’s continuation of the upward move suggest that short-term momentum is getting bullish.
- That’s good news for our long EUR/USD position. We do not change anything in our trading strategy. We stay bullish for 1.2400.
EURUSD Daily Forex Signals Chart
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