TALKING POINTS – EURO, ECB, AUSTRALIAN DOLLAR, JOBS, YEN, STOCKS
- Euro may fall as dovish ECB disappoints calls for ending QE
- Aussie Dollar lower as soft jobs data weighs on RBA outlook
- Japanese Yen higher as AsiaPac stocks follow Wall St. lower
All eyes are on the ECB monetary policy announcement in European trading hours. Big-splash volatility is likely despite the absence of an immediate change in baseline interest rates as investors look for officials to update guidance on the fate of the QE asset purchase program.
As it stands, the current €30 billion/month bond-buying effort is due to expire in September. Comments from ECB officials – especially chief economist Peter Praet – suggest the central bank’s Governing Council will hold a substantive discussion on how to proceed thereafter.
The Euro soared last year amid speculation that accelerating economic growth in the currency bloc and a series of rosy election outcomes – most notably in France, where Emmanuel Macron bested eurosceptic Marine Le Pen – will see QE unwound. Markets now expect policymakers to belatedly deliver.
They may be setting themselves up for disappointment. Eurozone growth has sharply slowed since the beginning of this year, base effects from last year’s exchange rate appreciation are weighing on inflation and political jitters have resurfaced in Italy.
Against this backdrop, Mario Draghi and company may be reluctant to pull back on accommodation. Instead, they mightdither on a clear-cut signal or even extend the existing program through December as an intermediate step before committing to a longer-term approach. Either will weigh heavily on the Euro.
The Australian Dollar underperformed in mostly quiet Asia Pacific, falling alongside local bond yields as disappointing employment data cooled on RBA rate hike prospects. The anti-risk Japanese Yen rose as risk appetite deteriorated in Asia Pacific trade (as expected).
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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com
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