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Talking Points:

  • The ECB extended its QE program through December and warned of slow eventual hikes leading to a broad and intense Euro drop
  • EUR/USD naturally responded sharply with the Fed hike Wednesday, but can the Greenback find a lasting run from this charge?
  • Despite sentiment highlights in European shares, the Nasdaq and junk bonds; risk trends continue to struggle

See how retail traders are positioning in EUR/USD, other key Dollar pairs and global equity indices as monetary policy adds to concern already stoked by trade wars. Find speculative positioning on the DailyFX sentiment page.

The ECB Battered the Euro, but Has it Triggered a Trend?

As expected, the European Central Bank (ECB) rate decision Thursday carried more weight for the FX market than the Federal Reserve's policy update the day before. In contrast to the Fed's hike and accelerated path of future tightening, the ECB extended its QE program beyond the expected cut off period again and reiterated its plans of a very slow removal of accommodation amid a spat of weak economic data. As far as policy change goes, this was rather intangible. However, market speculation has run rampant in projecting this particular group's eventual change in tack over the past year-and-a-half, so circumstance would leverage the response. The impressive advance for the Euro throughout 2017 was testament to the growing speculation that the ECB was close to turning the corner on its extreme monetary policy stance. Yet, the persistent delay of the anticipated first step taper and fading data weighed the currency's run alongside risk slip in risk trends. Thursday, the group announced that it would extend its QE another three months after the previously expected September end date with a $15 billion pace and rhetoric that sounds more like a retreat from ineffective policy than the close to a successful return to economic prosperity.

EURUSD Dives Through ECB and Fed Contrast, DAX Optimism Isn't Infectious

A Euro Hit or Euro Trend?

Given the breadth and intensity of the Euro's slide, it is reasonable to question whether this is just a short-lived - but intense - slip or the revival of a broader trend. Given that the shared currency had already started a slide a month-and-a-half ago, we only need to revive an existing trend rather than develop one from scratch. However, unless something more motivating comes along to drive the bears; this move is likely to slow and perhaps stall. In this policy development, the ECB certainly did extend an extraordinary dovish policy. That said, Euro-area accommodation is already considered one of the most dovish programs in the developed world and this move does not halt the inevitable end to the stimulus. It can help to undermine excess premium the Euro still retains from last year's undeserved rally, but it isn't ground breaking. Looking ahead to next week, the ECB's central banking forum in Sintra may help add context and pressure to the currency's next move.

EURUSD Dives Through ECB and Fed Contrast, DAX Optimism Isn't Infectious

The Dollar's Take Away from the ECB

It is rather straightforward that the sharp loss for the Euro would translate into an equally impressive gain for the Dollar via EURUSD. This pair in particular leverages the circumstances of monetary policy as the dovish turn for the ECB so significantly contrasts the Fed's decision Wednesday to hike its own benchmark rate the second time this year and to upgrade its forecasts to four total hikes through the end of the year. However, the benefit to the Greenback runs deeper than the simple contrast between policies. Once again, liquidity plays a key role in capital movement. The Euro represents the second most liquid currency in the market. When funds are diverted from this benchmark, they certainly find multiple avenues of diversification, but the most liquid counterpart will absorb the bulk of the flow. That happens to be the Dollar. Just as uncertain as the Euro's slide on this development is, the Dollar's bull trend is equally as uncertain. With headlines of trade wars, local political scandal and the University of Michigan sentiment survey ahead; it is difficult to secure a run. What's more, risk trends is a critical factor as well. If the Dollar's appeal versus the Euro is due to its carry appeal, we need a backdrop that prioritizes return.

EURUSD Dives Through ECB and Fed Contrast, DAX Optimism Isn't Infectious

Risk Trends and the BoJ

Keeping tabs on the undercurrent for risk trends is crucial for tracking the greater threat and opportunity for market-wide trend development. The ECB's dovish shift helps support the simple equation whereby stimulus fosters speculative reach for yield. That was certainly the case for European shares. Germany's DAX, France's CAC 40 and the Italian FTSE MIB all advanced on the headlines. There was some degree of spillover for enthusiasm as the UK's FTSE 100 also earned a strong move through the day. However, that sentiment was not fully contagious. The US benchmark indices showed little of the shared optimism to their European counterparts. The S&P 500 in fact carved a doji for the day that fit squarely in the previous session's range. Further, the 5-day (one trading week) ATR for the index hit its lowest level since January 2nd - when we were in full holiday trade. Outperformance for the Nasdaq does show a speculative opportunism underlying the market, but that is hardly going to translate into a full blown reach for return. The same is likely true for the upcoming Bank of Japan rate decision; however, the potential from the low probability scenario in this event shouldn't be written off. If the Japanese central bank were to even hint at its rise out of its extreme easing policy, the repercussions for global risk trends recognizing the era of extreme accommodation is coming to an end would be profound. We discuss all of this and more in today's Trading Video.

EURUSD Dives Through ECB and Fed Contrast, DAX Optimism Isn't Infectious

If you want to download my Manic-Crisis calendar, you can find the updated file here.