All bets are off as today as the European Central Bank is due to deliver its monetary policy and explain why PEPP purchases didn’t increase significantly as promised six weeks ago
Today is ECB day, and all bets are off as to what the central bank will communicate.
Market participants had trouble understanding the message the central bank tried to send at its last meeting because asset purchases did not increase significantly in subsequent weeks as the bank had promised.
The euro has traded with a bid tone in recent weeks, gaining ground against all its peers including the US dollar. Should the ECB remain indifferent to the recent euro strength, the market may decide to stretch shorts even higher. In any event, volatility in the euro pairs is expected to increase significantly.
The US stock market indices staged a comeback yesterday after showing some weakness in the first two days of the trading week. The Dow Jones is back above 34,000 and the S&P 500 is above 4,150 points on the back of a strong earnings season for corporate America in the first quarter of the year.
On the commodities front, gold remains well bid (now threatening to break above $1,800) while oil is back close to the $60 level.
As usual, the ECB press conference will follow forty-five minutes after its rate announcement. The format has changed in recent years, such that the interest rate announcement is now accompanied by snippets highlighting the main policy changes (if any).
Most of the market’s volatility typically occurs during the press conference, especially during the Q&A when — this time — financial press representatives will grill Christine Lagarde about the recent miscommunication about asset purchases.
Markets to Watch
The DAX index, GBP/USD, and EUR/JPY markets are in focus today.
The German DAX index found support close to the 15,000 area and bounced in line with the comeback seen in the US stock market. Today’s ECB decision will affect the DAX because a weaker currency tends to bode well for the stock market while a stronger currency should weigh on it.
The 1.40 level remains pivotal for the GBP/USD pair, just like the 1.20 level does for the EUR/USD. The market appears to have found temporary support after the last time it was rejected from 1.40, and now it threatens to break the 1.3950 resistance.
The EUR/JPY cross pair struggles at the 130 level, where both bulls and bears both have a case. So far, any attempt to break higher has been met with heavy selling. A possible rounding top formation may be in place, signaling more weakness on a daily close below 130.
Winners and Losers
The EUR/USD remains the winner of the week so far as it regained the 1.20 level ahead of the ECB decision. On the flip side, oil got rejected at $64 and now is back to the $60 area.