All focus today will be on the ECB rate announcement and while we expect tapering announcements, we shall be tracking the amount of QE extended till end of 2018.
There are risks though especially for Euro bulls. While we expect Draghi to announce monthly purchases of about €30B throughout 2018 and plans for reinvestment following tapering, risks will come if purchases are reduced say by €20B to €40B for 12 months. Currently, the ECB purchases quality and scarce €60B worth of bonds.
Either way, I think there will be a reaction to the downside which in my opinion will provide a wonderful buying opportunity.
Despite these purchases and strong economic fundamentals in Germany and France, the ECB is still concerned with inflation not growing as expected and any form of tightening without inflation passing the 2% threshold could present risks and drag the entire region back to deflation.
Plus, the ongoing Catalonia political standoff is another challenge that needs to be resolved. Anyway, we expect the deposit rate inch higher beginning 2019 and a consequent shift of capital inflows into the Eurozone following this rate normalization. Both situations are obviously supportive of the Euro.
As noted, the Germany bunds yields also dropped following ECB’s late June Sintra meeting. From the charts, there is a potential of a further slide down even though it is 90% down from 2008 highs of 4.5%. If Draghi turns out to be hawkish, then the Euro and German Bunds will rally.
In the 4HR chart, stochastics are turning from over bought territory and a sell signal is already in place. Secondly, notice that double tops at ¥134.50. If there is a price surge above ¥135, then we cancel the bear projection and look to buy. However, the monthly chart and the bunds are over extended to the upside and perhaps maybe we should be selling as many expect a dovish tapering announcement.
From a technical perspective, I will be expecting two scenarios. A hawkish taper followed by ECB announcement of reinvestment plans and Euro will surge above resistance trend line at ¥135. On the flip side, a dovish statement-€40B for 12 months, with no mention of reinvestment plans or that of shoring inflation and price will dip. My first target will be ¥131 and ¥128 through to December. However, I will wait first till after today’s announcement since price action is trending at significant resistance levels.
Have a good trading time guys.