Draghi lights the blue touch paper

Earlier this week I questioned whether or not the ECB boss, Mario Draghi would look

through the recent Eurozone weakness. I said that personally I didn’t think he would. Well,

in not actually doing that yesterday, the ECB went even further with the relaunch of a new

long term bank lending program- TLTRO and later slashed their 2019 and 2020 growth

forecasts. The impact on the EUR wasn’t necessarily dramatic, but the single currency did

nevertheless suffer its biggest one-day loss for several weeks’ yesterday.

The EURUSD fell through 1.1250, then tripped stops below 1.1235 and 1.1216 (the previous

two interim lows) before testing a key support level overnight at 1.1187- a level I mentioned

to you in Monday’s update. To better see and understand that please take a look at the

chart below.

As you can see the price has fallen to touch that green horizontal level at 1.1187. In fact, the

low printed overnight has been 1.1185, but I think we can overlook a pip or two when it

comes to these long term Fibonacci levels. Having lifted slightly off that level early this

morning the question still remains as to whether or not this will hold come the close tonight

or further down the road?

Personally, I am not sure that it should from a fundamental point of view if nothing else, and

let’s not forget that later on we have some key US data that could impact the price here

too- the latest US monthly jobs report- more on that in a second.

Meantime, the equity and bond markets have reacted swiftly to this move from the ECB,

with European bonds all rising steeply. Indeed, there has been a wider impact across all

global financial markets with equity index losses in the US yesterday and a sharp pullback in

US yields. The US 10year note, which had risen above 2.75% earlier this week, is back

around 2.63% this morning.

Asian markets have fallen back markedly too overnight and it’s a sea of red across the globe

this morning, all of which has not been helped by news from North Korea; that apparently

at least one of their nuclear launch sites appears to be ‘active’ again. The impact of that

news and the lack of traction in the US/China trade talks I think has perhaps weighed more

on Asian equity markets than anything else today. Consequently, this has translated into JPY

strength with the USDJPY dipping below 111.00 overnight.

However, those are possibly not the main driver for the JPY gaining at the same time as the

EUR weakening. That’s as much down to the fact that the ECB move yesterday has ensured

that the EUR will remain the markets’ ‘funding’ currency of choice for a lot longer than was

previously envisaged, and certainly more so than the JPY. Perhaps unsurprising therefore

that the biggest G7 pairing move over the past 24hours has been seen in the EURJPY.

So, later today we will get the US jobs report for February. Earlier in the week the latest ADP

report (sometimes a good barometer of that) came in pretty much as expected, but with a

significant upside revision to January’s numbers. So if we get a strong report today I am not

sure how that will be received by the US and equity and bond markets.

I said on Monday that the wages component could be significant and that’s still something I am going to be paying close attention to later today, for any signs of wage pressure, or the lack of it. We shall just have to see what gives I guess, but overall there can be no doubting that the US economy is still in a vastly different, and better place to that of Europe. That in turn is why the US dollar is where it is after all and as much as the US president may not like it, he will probably have to learn to live with it and save his rhetoric for more important issues.

Indeed, turning more directly to the dollar itself, lets also take a peek of a chart of the USD

index today which has nudged back to look at its 2018 highs again, reaching 97.64 ahead of

the European reopening.

As you can see the price has lifted to touch that red horizontal line that I have drawn on this

chart with 3 tops all coming in around that 97.70 level. Hence a clear break of this now

could lead to a significant further upside move. I think its quite pertinent also that a break of

97.71 will likely tie in with a ‘clear’ breakdown through that 1.1187 EURUSD key support

level.

It’s sometimes difficult for me to get out all that I want to say without writing a monologue

here, so I am going to simply end this update by referring back to the headline and say that I

think the move by the ECB yesterday is significant. It has highlighted all that I have been

concerned about for some time, and that which the equity markets have chosen to ignore

so far this year- global growth, or more rather the lack of it. In that sense I think the ECB has

indeed lit the blue touch paper by reigniting those concerns.

Important Economic Releases Due today

08/03- 1.30pm US February monthly Jobs report