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Asia AM Digest: ECB Sinks the Euro, Tax Cut Hopes Boost US Dollar

Asia AM Digest: ECB Sinks the Euro, Tax Cut Hopes Boost US Dollar

Research, Research Team

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The Euro sank in the aftermath of the ECB monetary policy announcement, as expected. The central bank halved the size of QE asset purchases to €30 billion/month and extended the program for nine months. President Draghi stressed that purchases won’t abruptly end in September however, signaling a “tapering” process to follow and thereby implying more stimulus than markets projected.

The US Dollar traded broadly higher after Republicans in the House of Representatives adopted a budget resolution fast-tracking the adoption of tax reform by year-end. Draft legislation is due by November 1. Markets have speculated that their plan to lower tax rates will prove inflationary, pushing the Fed into a steeper rate hike cycle. US Treasury yields dutifully rallied alongside the greenback.

DailyFX Economic Calendar: Asia Pacific (all times in GMT)

The economic calendar looks rather tame in Asia Pacific hours. Japanese CPI figures understandably passed without much fanfare. Inflation registered in line with expectations, offering little fodder for BOJ policy speculation. In any case, a dovish posture is probably locked in for the foreseeable future after Prime Minister Shinzo Abe’s recent triumph in a snap election handed his coalition the reins of power through 2021.

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IG Client Sentiment Index Chart of the Day: EUR/GBP

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Retail trader data shows 42.0% of traders are net-long EUR/GBP, with the ratio of traders short to long at 1.38 to 1. In fact, traders have remained net-short since Oct 12 when EUR/GBP traded near 0.89189; price has moved 0.4% higher since then. The number of traders net-long is 2.3% lower than yesterday and 0.5% lower from last week, while the number of traders net-short is 4.9% lower than yesterday and 11.3% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/GBP prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/GBP price trend may soon reverse lower despite the fact traders remain net-short.

Five Things Traders are Reading

  1. Japanese Yen Little Changed Following Strong CPI Data, BOJ on Tap by Varun Jaitly, DailyFX Research
  2. EUR/USD Flirts with Disaster as Post-ECB Selloff Targets Key Support by Michael Boutros, Currency Strategist
  3. USD/JPY Outlook Mired Ahead of US GDP Amid Failure to Test July-High by David Song, Currency Analyst
  4. Trading the U.S. Dollar Breakout: Price Action Setups by James Stanley, Currency Strategist
  5. Near-term Setups in AUD/USD, Ethereum and EUR/JPY by Michael Boutros, Currency Strategist

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.