What to watch: ECB decision set to control market attention

The upcoming week is dominated by various central bank meetings to discuss monetary policy, with the European Central Bank (ECB) interest rate decision on Thursday the most likely to attract attention. The EU economic sentiment took another step backwards following early morning news today showing that Italian GDP contracted further than originally thought, alongside the German Manufacturing PMI unexpectedly being revised down to show contraction. Both of these results are going to increase focus on the ECB meeting, where President Mario Draghi will be under pressure to deliver the financial markets an early Christmas present.

Even if the ECB refuse to act this month, Draghi’s press conference following the meeting is likely to see him flooded with questions regarding what impact the OPEC decision not to cut Oil production will have on EU inflation. In the short-term, this is certain to have a detrimental impact and with EU inflation already worryingly low, at an annualised 0.3%, Europe is likely to continue slipping towards deflation territory. This also means that Draghi will continue to remain pressured to reinvigorate economic growth through increased monetary stimulus, with the EURUSD subsequently looking to the downside as a result.

Much of the expectations for introducing further stimulus to the Eurozone are from outside Europe, with US Treasury Secretary Jack Lew recently warning that the EU economy is at risk of “losing a decade”, while the IMF suggested “the regions fragile recovery could come to a stall and threaten the world economy”. I don’t expect the ECB to act this week because I don’t think the EU economic problems are down to ECB policy. In my opinion, the economy is suffering with reduced demand from Asia, low confidence in the global economy and the possibility of sanctions of Russia have a detrimental impact on EU trade. However, this is not going to limit external pressure on the ECB to reinvigorate growth and therefore, the EURUSD risks are likely to remain to the downside.

EU Sovereign Yields falling to record lows last week suggests the markets are expecting the EURUSD to fall further and, unless we encounter a repeat of October’s financial market sell-off, the EURUSD appears more likely to move towards support around 1.2491 and 1.2350.

The Reserve Bank of Australia (RBA) rate decision is announced on Tuesday and, although the Aussie has tried to recover some losses after dropping 200 pips last week, any more mentions of the RBA possibly cutting interest rates will inspire downside Aussie movement towards support at 0.8416. Australia is likely to be one of the economies impacted by weaker commodity prices, so it wouldn’t surprise me if the RBA continue to talk down the Aussie. Policy makers may argue that the OPEC decision to not cut Oil production will push the central bank towards loosening monetary policy sooner than they would otherwise; additionally they may also suggest increased signs of China’s economy slowing down will have a negative impact on Australia.

Signs of US economic activity improving this week will further pressure metals and commodities, despite both experiencing heavy selling towards the latter end of last week. An impressive US Manufacturing ISM and Non-ISM Manufacturing Composite will increase optimism that the Federal Reserve will discard global economic certainty elsewhere, and continue moving towards normalising monetary policy. The majority of headlines are focusing on the drop in Oil prices, but investors should also be paying attention to Gold and Silver. From a technical standpoint, both appear bearish and a strong US NFP at the end of the week will further allow the bears to dominate.

I am not completely ruling out Oil or Metals attempting some sort of recovery, but it would require fears over the Federal Reserve delaying rate rises or USD profit-taking to enable this. In the event this happens, Gold would need to successfully surpass $1180 to attempt a re-entry to $1200, while Silver is currently finding resistance at $15.80 preventing entrance to $16.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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