Trading Notes – Is the ECB set to under-deliver?


  • With the markets seeming to firmly price in a rate hike by the Fed on 16th December this week’s Non-farm Payrolls report will need to be disastrous for the markets to have a serious wobble, so attention is squarely on the European Central Bank as a major driver this week. With dovish comments from Draghi in the last meeting the expectation is that the ECB is ready to act in the final meeting of 2015 and expand its easing measures in some shape or form. However with the euro trading close to 8 month lows as part of a consistent sell-off since the last meeting on 22nd October (losing c. 750 pips in the 6 weeks) could it be that once more the market has gone too short on the euro? Is it all set up for the ECB and Mario Draghi to over-promise and under-deliver on Thursday?

draghi eqe

  • There are some fairly high expectations on the ECB already baked in. The German 2 year Shatz at less than -0.400% would suggest the market is pricing in a 20 basis points cut to the deposit rate, whilst there is also debate over whether an extension to monthly purchases (to €70bn) with a lengthening of the program by 6 or even 12 months could be seen. The lack of consensus over the expected actions will mean big volatility through the meeting. My feeling is that Draghi will not go the whole hog at this meeting, choosing to hold something back, but add in a dovish tone to the outlook. For me, this could induce a short squeeze on the euro and a rally.
  • The strength of the dollar has been on the expectation of a Fed rate hike in December. The dollar has made gains versus the euro, sterling and the yen. Once again though it seems that much is already priced in for the dollar. “It is better to travel than arrive” with the trade weighted dollar towards the March highs (resistance at 100.4). I do not think it will be a terribly interesting Payrolls report this week and that will be positive for the dollar as it will all but cement in the rate hike. The dollar could have further to run on this payrolls report but I would be concerned about being too long in the wake of the Fed meeting.
  • There is a huge amount of tier one economic data which will be driving trades through the week. The ISM Manufacturing data will be key on Tuesday in the wake of the disappointing Chicago PMI on Monday. It is now adding weight to my conviction that I am a expecting the Fed to hike in December, but the pace of rate increases will be slow. This is playing out in the lack of upside traction in the US 10 year yield despite the 2 year yield remaining strong. As such the spread of the 2 and 10 year Treasuries is at its lowest since February.
  • Watch also for a clutch of FOMC members speaking this week with 5 pencilled in (Evans, Brainard, Lockhart, Williams and Fischer) in addition to the testimony from Janet Yellen to the Joint Economic Committee. Markets will obviously be watching out for any monetary policy hints from Yellen. For me the risk is to the dovish side with Yellen generally still fairly dovish.
  • Equity markets have been broadly failing to make any real gains – with the exception of the Eurozone indices (DAX especially). The big question is if Draghi underwhelms, can the DAX hold up after 22% gains in just 2 months? I have my doubts. There is still a negative correlation play with the DAX and the euro and if the euro engages a short squeeze rally, the DAX will be hit hard. Has this already been the December rally playing out too early? Traditionally the run up to the end of the year is a positive for equities, but has the Santa Claus rally come early this year?
  • Commodity prices remain impacted by the strength of the dollar – see the size of the rebound on gold (c. $20) in the wake of the worse than expected Chicago PMI. This is another asset class that could see a rally if any key US data suggests that future growth prospects are questionable.
  • Watch for: ECB monetary policy, Non-farm Payrolls



EUR/USD – All eyes on the ECB, but will Draghi deliver? Expect volatility on Thursday      

  • The focus will be on the ECB this week and the tendency for the market to over-extend could easily set the euro up for a short-squeeze rally. There is likely to be volatility both on the announcement of monetary policy at 1245GMT (look for any change in the deposit rate) and then also during the press conference (on changes to QE and Draghi’s outlook). With such a large proportion of the market short, could it be set up for a rally?
  • There is still an element of a bearish drift on the euro (despite Tuesday’s minor early rally)  but the small daily traded ranges suggest a lack of intent to take a position in front of the ECB. The technical momentum remains deeply bearish, but the market will move on the ECB.
  • Watch for: ECB monetary policy, Non-farm Payrolls

GBP/USD – Rallies remain a chance to sell in front of payrolls

  • The dollar strength remains a big drag on Cable but with so much data this week there will continue to be some data driven intraday opportunities to trade in front of the payrolls report. I continue to expect sterling to remain under pressure ahead of the Fed meeting.
  • There is plenty of resistance still in the band $1.5100/$1.5200 to contain a technical rally and I expect further pressure on the low at $1.4990 prior to the likelihood of further weakness. Technical signals suggest further downside potential and rallies remain a chance to sell. Key resistance is at $1.5335.
  • Watch for: UK Services PMI, US ISM data and Non-farm Payrolls

USD/JPY – Any breakout will be data driven and likely to the upside  

  • Moves will continue to be data driven this week and this should maintain the bullish bias on the pair
  • A trading range 122.20/123.67 has formed but with the technicals with a bullish configuration any breakout should be to the upside. Above 123.67 opens the high at 125.28.
  • Watch for: US ISM data and Non-farm Payrolls

Gold – Use the technical rally as a chance to sell

  • The gold price is driven by the dollar moves once more and this week the moves are data driven. The rally (on the worse than expected Chicago PMI) now has a raft of tier one economic data to contend with. Both ISM data come prior to the Payrolls report. I expect the net result will be the strengthening of expectation for a Fed rate hike in December and therefore gold price weakness.
  • The last 3 rallies on gold have all been around $20 and the latest one is into a band of key overhead supply. The resistance should provide the basis of the next leg lower and I expect a retest of $1152.50 in due course. Above $1098 is needed to abort the selling pressure.
  • Watch for: US ISM data and Non-farm Payrolls

Indices – The ECB could induce some profit-taking on DAX if it underwhelms   

  • S&P 500 – The S&P 500 has struggled to maintain the bull momentum and is at risk of coming under renewed profit-taking. The key overhead resistance at 2116/2135 is likely to once more be a step too far.
  • DAX Xetra – The 23.6% Fibonacci retracement at 11,438 is the next consolidation point but the DAX will move on how dovish the ECB opts to be. For this reason I expect the DAX to come under some profit-taking pressure as Draghi underwhelms.
  • FTSE 100 – The continues struggles amid bearish pressure on heavy weighting basic resources sectors (metals and oil) is still weighing hard. FTSE 100 just cannot gain the momentum needed to breach the 6400/6500 resistance barrier. The bears are likely to return in due course to test 6221 support initially.



Tuesday 1st December

  • US – ISM Manufacturing PMI

Wednesday 2nd December

  • US – ADP employment report
  • Canada – BoC monetary policy
  • US Crude Oil Inventories

Thursday 3rd December

  • UK – Services PMI
  • Eurozone – ECB monetary policy + press conference
  • US – Weekly jobless claims
  • US – Janet Yellen testifies to the Joint Economic Committee
  • US – ISM Non-manufacturing PMI
  • US – Factory Orders

Friday 4th December

  • OPEC meeting
  • Canada – Unemployment
  • US – Non-farm Payrolls
  • US – Average hourly earnings, Unemployment



Monday 7th December

  • Japan – GDP (Q3 final)

Tuesday 8th December

  • China – Trade Balance
  • UK – Industrial Production
  • US – JOLTS job openings

Wednesday 9th December

  • China – CPI
  • US Crude Oil Inventories
  • New Zealand – RBNZ monetary policy

Thursday 10th December

  • Switzerland – SNB monetary policy
  • UK – Trade Balance
  • UK – Bank of England monetary policy
  • US – Weekly Jobless Claims
  • US – Philly Fed Manufacturing

Friday 11th December

  • US – PPI
  • US – Retail Sales
  • US – University of Michigan Sentiment (prelim)