The ECB meet on 8 June to present their account of monetary policy. Since the last Governing Council meeting the Euro has been stronger than all its major counterparts with German 10Y yields on par with where they were in April. Recent data points show a drop in Eurozone inflation. A higher exchange rate and high volatility in energy prices is certainly not helping.

Softness in US data has continued since the last FOMC meeting in March, with the latest NFP result coming in lower than expected with a lower revision for April. While the Fed Watch Tool still indicates a 94.6% chance of a rate hike in June, the Dollar Index and US10Y yields do not provide a technical representation of this.

Since the April meeting energy prices (WTI Crude) dropped from $54.00 to $44.00, moved back up to $52.00 and is currently just below $48.00 per barrel.

The rally in the S&P 500 has continued since the April meeting with price currently at record highs. Movement in the Dax has been sideways since May with price currently at the top of the range.

According to the Account of Monetary Policy released at the April meeting the ECB would like to see a convincing, self-sustaining upward trend towards the Governing Council’s inflation target of 2% and that no premature and unwarranted action should be taken until this is observed as this could pose a threat to monetary policy achieving its objectives.

According to my analysis, it is highly unlikely for the ECB to communicate any change to monetary policy at their next meeting as far as tightening is concerned. We know that inflation is important to the ECB and a lower exchange rate helps increase inflation and with lower inflation readings lately would it not be a goal for the ECB to use this meeting as an opportunity to move the spot rate lower?

The Euro is quite high and we know that’s where Bears sell. Of course, Central Banks can do whatever they want and the market can remain irrational a lot longer than you or I can remain liquid so all there is to do is maintain a bias and look for opportunities to execute our buy or sell order accordingly. Personally, I see no fundamental reason to buy the Euro and will be looking for opportunities to go short at resistance against stronger currencies. Of course if I don’t get the setup then no dice.

Recent Data Points
Apologies for the bad layout of the following data points. For some reason, the text does not want to justify despite several attempts. To those with OCD, happy reading 🙂
Health of the Consumer
German Retail Sales MoM:…………………………………………………………..-0.2% vs. 0.2%
German Retail Sales YoY:…………………………………………………………..-0.90% vs. 2.30%
Eurozone Retail Sales YoY:………………………………………………………… 2.30% vs. 1.80%
Eurozone Consumer Confidence:………………………………………………………-3.30 vs.-3.30

Labour Market
German Employment Change:…………………….-9k vs. -15k
German Unemployment Rate:…………………….5.7% vs. 5.8%
Eurozone Unemployment Rate:…………………..9.3% vs. 9.4%

Inflation
German PPI YoY:……………………………..3.40% vs. 3.10%
German CPI YoY:……………………………..2.00% vs. 2.00%
Eurozone CPI YoY:……………………………1.40% vs. 1.90%
Eurozone CPI Core YoY:……………………….0.90% vs. 1.20%

Business Activity
German Manufacturing PMI:…………………….59.5 vs. 59.4
German Composite PMI:………………………..57.30 vs.56.70
Eurozone Manufacturing PMI:…………………..57.0 vs.57.0
Eurozone Composite PMI:………………………56.80 vs. 56.80
Eurozone ZEW Survey:…………………………35.10 vs.26.30
German IFO Business Climate:………………….114.60 vs. 112.90
German IFO Expectations:……………………..106.50 vs. 105.20
German ZEW Economic Sentiment:………………..20.60 vs. 19.50
German ZEW Current Situation:…………………83.90 vs.80.10

Market Indicators
DAX………………………………………..12452.10 vs. 12843.70
German 10Y Bond……………………………..0.271 vs. 0.300
US 10Y Bond…………………………………2.15 vs. 2.30

EURUSD Daily

Based on previous price action going back into 2016, we can see that EURUSD tends to fall when it gets to 1.1300/ 1.1350/ 1.1400. In fact, if you follow Wayne McDonell's alpha on the EURUSD you will know that this is where the ECB usually dump Euros due to the exchange rate getting a little too high for comfort. Perhaps things have changed since then and maybe that is no longer their strategy though regardless, one certainly cannot buy at resistance. The projected top for the month is at 1.1500/ 1.1600 and the market is currently Bullish.

EURGBP Daily

EURGBP is a little more tricky than the other Euro pairs due to the political risk taking place in the UK at the moment though I include it due to the possible correction that could be seen should Euro weaken post the ECB meeting. It looked like price found a top at MM3/ last week's WM3 though a stronger Euro and weaker Pound saw price move slightly higher above 0.8750. Resistance eyed at 0.8800, 0.8850 with the top for the month projected at 0.8900/ 0.9000. Market is currently bullish.

EURJPY Daily

As we can see price is moving sideways with 125.500 marking the top of the range and 123.500 marking the bottom of the range. A weak Euro post ECB and a strong Yen as a result of market taking profit ahead of the Comey testimony (I am speculating here though it is possible) could make this a nice trade. Price has come off MM3 and while we would like to see a break of support at the bottom of the range, MM3 gives us a target of MM1 which is the projected bottom for the month.

5 thoughts on “ECB Interest Rate Decision 8 June Review”

  1. Alysa Sage says:

    Hey, Ryan,

    Love the deep analysis and technical/fundamental thought you put in every post. I do have a question though, I looked at the COT Report and it looks like the trend for the Euro has turned a little bullish. It is net long, with the last two weeks consolidating where it could’ve been the transition from net short to long. I also have looked at Wayne’s analysis into selling at long term resistance, still a viable strategy. Please, let me know your view and analysis here because I am still trying to understand the market and the COT Report all together…

    I looked at the past long term resistance in correlation with the COT Report. Every time the resistance was hit at 1.14, it held, with the COT Report showing a bearish market Net Short over Long. Now, that it’s turn more bullish, could the long term resistance hold? Or, could it just be from the French Election all the hype was created over with it creating a hard sell at 1.14 resistance? It also seems like the QE ECB is trying to put in place isn’t working out to well, so could they let it rise past 1.14 to create more money in the market from exporting partners? The US is one of the biggest trade partners with the Euro, and has a large deficit. Would an appreciating currency be good for the Euro because the ECB’s QE isn’t working, filtering more money into their economy from outside sources?

    Well, just trying to get a handle on this and the COT Report with correct interpretations. Please, let me know any feedback you have the time to report or anything that I’ve missed. Thanks again though for your thoughtful analysis.

    1. Ryan Gandalf van Jaarsveld says:

      Hi Alysa – thanks for the detailed comment. The COT report does show a NET bullish position though do you also notice that this is mostly due to Bears taking profit which one can see from the continued decrease in short positions week over week. Note that the increase in long positions is not as significant though there has been some increase. If you read through previous ECB statements you will notice that the ECB are happy with the outcome of monetary policy and QE – this could be causing some market participants to think that tapering is on the cards despite the ECB communicating that the time for a change in policy has not arrived yet. The way I look at it is if Bears are getting out by taking profit and this is causing the spot rate to rise then are Bears likely to get back in at resistance if the reason they sold in the first place is still valid? Nothing fundamentally has changed and therefore my analysis tells me that the ECB will continue weakening their currency using their asset buying program and negative interest rates until they communicate otherwise. If a central bank is using monetary policy to weaken their currency then I want to sell that currency and so I will look for opportunities to short at key levels of resistance. Of course, I won’t just throw a trade down, I will look for things like double tops followed by lower lows and lower highs so as to make sure I am not selling in a bullish trend but entering after a confirmed reversal of that trend. If I don’t get a reversal then I look for an opportunity at the next level of resistance. Whether or not price comes down at that resistance does not matter because my bias is not decided technically. I am a bear because of the fundamentals. That’s why patience and discipline are as important as knowing whether you are a Bull or a Bear. Does that make sense?

      1. Alysa Sage says:

        Yes, that makes perfect sense. I was reading up on QE and it didn’t look like it was working but I’m having trouble interpreting the data still. I will take a look again at the COT Report as try to understand it while going over QE again. Thanks for replying and explaining everything. It really helps.

  2. Giveness TSHIMOMO says:

    The summary of the economic data points, is a really nice and easy way to look at things. I too remain a bear and will be looking for opportunities to sell EUR

    1. Ryan Gandalf van Jaarsveld says:

      hundreds bud

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