EUR/USD Weighed by ECB Prospects; Fed Hike Odds Remain Muted
- Market's reconsideration of ECB message evident in EUR/USD price action.
- As market volatility is set to rise with summer ending, it's a good time to review risk management principles.
If you're one for event-driven volatility, yesterday's ECB meeting was for you. A lack of rate cuts - not surprising - and no changes to the QE program - more surprising, but still not major - were the headline news items. No new dovish ECB action? Bullish Euro, naturally! Yet here we are, with an inverted hammer on our hands in EUR/USD.
The subtleties of ECB President Draghi's press conference eventually took root in investors minds, and as we suspected heading into the meeting, the ECB is not pleased with the current state of the Euro-Zone economy. Pledging to keep rates lower for longer per usual, President Draghi turned his attention to fiscal authorities, prodding them harder that he usually does. In a sense, the ECB has laid out a unified message the past few weeks (if you recall, at the Jackson Hole Economic Policy Symposium, Benoit Couere issued similar remarks).
For better or for worse, the ECB has started to pave the runway for the next round of easing. The simple fact is that the condition that the ECB laid out - fiscal authorities stepping up to stimulate growth - will not be met. Asking for a change in fiscal policy now - while 100% necessary across many Euro-Zone countries - is politically infeasible: Italy has a constitutional referendum coming up in November; French and German elections are next year; and the EU still needs to deal with the Brexit negotiations.
The ECB suggesting that, 'if fiscal authorities don't do more, we will,' is as strong as a signal as any that more easing is coming - recent history and common sense tell us the political status quo won't evolve materially before the end of 2016. If we color this meeting as a tinge dovish, we could very well be on the way to a trifecta of central bank dovish tilts; the September 21 FOMC and BOJ meetings could easily see the Fed fail to hike and the BOJ upgrade its QQE programs.
--- Written by Christopher Vecchio, Currency Strategist
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