Good morning,
Reuters reports today The dollar edged slightly down against the euro on Thursday, but its losses were limited ahead of a European Central Bank meeting later in the day that could pave the way for further quantitative easing.
The ECB is likely to stop short of actually taking new policy steps at the meeting as it awaits fresh indications about the outlook for flagging euro zone inflation.
"The consensus view is that we won't see additional stimulus, but the door will be left open," Chris Weston, chief market strategist at IG Ltd in Melbourne, said in a note to clients.
"It seems Mario Draghi will try and keep a lid on EUR moves so it may be really hard and risky to be long EUR/USD," he added.
The median probability of the ECB extending its 1 trillion euro ($1.13 trillion) asset purchase programme beyond its current end date of September 2016 was 70 percent, according to a recent Reuters poll of economists. The same poll saw a 40 percent chance that the ECB would increase its monthly purchases over the next six months.
The European Central Bank is likely to keep the door open for more monetary stimulus but stop short of taking new policy steps at a meeting on Thursday as it awaits fresh indications about the outlook for euro zone inflation.
Consumer prices in the 19-country euro zone fell in September, prompting calls for the ECB to expand or extend its 60 billion euros ($68.09 billion) a month of asset purchases. The programme was launched in March to help push inflation back to the ECB's target of just under 2 percent.
While stressing their readiness to act, the bank's policymakers have said the fall in prices is largely due to energy costs, which the ECB cannot influence, and that it is unclear whether a slowdown in emerging economies will have a lasting impact on the euro zone.
Many also hope a fading of the base effect from 2014's oil price plunge will help push inflation higher by year-end.
Their cautious tone suggests the ECB will wait until it gets new inflation forecasts from its staff in December before deciding on any change to its quantitative easing scheme. A broader debate meanwhile appears to be taking shape within the bank about whether monetary policy is already coming up against the limits of its effectiveness.
"We think the ECB will signal that it stands ready to act if needed, and that the door is open for further easing but more likely at the December or January meetings," economists at JP Morgan said in a note to clients.
Euro zone economic growth is slowing again, with even powerhouse Germany seeing a recent string of poor data, and one of the ECB's favoured gauges of inflation expectations, the five-year, five-year euro zone breakeven forward , has fallen to 1.7 percent from 1.85 percent in July.
Lending surveys have continued to improve, however, providing some ammunition for ECB President Mario Draghi to argue that QE is finding its way into the real economy and does not urgently need to be adjusted.
Draghi has said the ECB is prepared to intervene if risks to inflation increase or financing conditions tighten, and has cited the exchange rate as a key factor for price stability.
The single currency has strengthened since the last ECB meeting in early September, due in part to the Federal Reserve's decision to postpone its first post-crisis rate hike, and is currently trading at 1.13 against the greenback.
"It seems that a euro/dollar at 1.15-1.20 may represent a sort of 'pain threshold'," said Marco Valli, chief euro zone economist at UniCredit Research. "This implies that dovish rhetoric is very likely to continue and, possibly, intensify this week.".
SCOPE TO DO MORE
ECB Vice President Vitor Constancio recently said there would be scope for the ECB to ramp up QE, as its programme is smaller relative to the size of the euro zone economy than those launched by the Fed, the Bank of Japan and the Bank of England.
The median probability of the ECB extending QE beyond its current September 2016 end-date stood at 70 percent in a recent Reuters poll of economists. The same poll saw a 40 percent chance of increased monthly purchases over the next six months.
Yet analysts have warned that upping the pace of purchases may create a shortage of bonds down the line and that extending the scheme may require the ECB to change some of the rules of engagement to avoid hitting technical limits.
These issues, along with the ECB's failure to revive the market for asset-backed securities, have raised the prospect of an expansion in the range of assets that the ECB can buy to include corporate bonds or even equities. But its direct involvement in private corporations could meet political and internal resistance.
Markets currently see a 50 percent probability of a further cut in the deposit rate from -0.20 percent, according to Morgan Stanley estimates. Such a move was seen as effective in knocking down the euro, but would be unprecedented and could damage the ECB's credibility as Draghi has repeatedly said no more deposit rate cuts were possible.
Thursday's meeting, which takes place in Valletta, will be the last for two policymakers, Ireland's Patrick Honohan and Christian Noyer of France, who are stepping down.
The lack of obvious solutions and the diminishing effectiveness of QE in driving up inflation raise questions about whether the ECB has effectively exhausted its toolbox.
ECB governing council member Ewald Nowotny said last week that "new instruments" were needed. He cited economic reforms, deeper European integration and measures to stimulate demand, which was seen as a reference to more expansive fiscal policies.
With monetary policy already ultra-accommodative and the euro zone faced with structural challenges including an ageing population, some economists went as far as saying the ECB may eventually have to pare back its ambitions.
"In a scenario of prolonged undershooting of inflation, the ECB will need to be open to the idea of taking a longer time to meet the target or reformulating the target," said Anatoli Annenkov, an economist at Societe Generale.
The euro was up about 0.1 percent on the day at $1.1345 , holding above a 10-day low of $1.1306 touched on Monday but still shy of last week's levels above $1.400.
Against its Japanese counterpart, the dollar inched down about 0.2 percent to 119.69 yen , mired in a familiar range ahead of next week's policy meetings by both the U.S. Federal Reserve and the Bank of Japan.
"Volatility is down, so everyone is trying to decrease their dollar call options, but the downside should be limited as well," said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo.
One-month dollar/yen implied volatility , which measures the cost of hedging against sharp swings in the yen, stood at 8.250 percent on Thursday.
That was its lowest level since Aug. 21, and well under two-year highs above 13 percent hit as recently as late August.
The Australian dollar, meanwhile, picked itself up from one-week lows plumbed in the wake of Wednesday's sharp fall in Chinese equities markets and a steep drop in crude oil prices. The commodity-linked Aussie is often used as a proxy for China, Australia's main export market.
China's benchmark indexes edged higher on Thursday a day after marking their worst daily performance in five weeks in the previous session, which most traders attributed to profit taking.
The Aussie added about 0.3 percent to $0.7228 , moving away from the previous session's low of $0.7200, its deepest nadir since Oct. 14.
Wednesday's weaker oil prices also weighed on the Canadian dollar.
The loonie skidded more than 1 percent against its U.S. counterpart after the Bank of Canada held its key rate steady as expected and also hinted that any hikes would be in the distant future, as it lowered its growth forecasts for both 2016 and 2017.
So, guys, our EUR setup didn't work. It is wrong to say that setup has failed probably, because we initially has specified some gambling features of this journey and we were ready for this risk. Following our logic, it probably makes sense to go short on EUR, but picture looks a bit blur and EUR less interesting compares to other currencies.
Today we will take a look at CAD again, since market is approaching to our target. On daily chart you can see that our B&B has started well precisely at the level that we've discussed in weekly research. But it has not reached yet the target - 5/8 Fib resistance level 1.3217. Take a look that there will be also an overbought. Since we preliminary have chosen this level for short entry, it will be nice because we will get bearish Stretch pattern there as well. Entry will be relatively safe:
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On 4-hour chart market indeed has turned to forming of reverse H&S pattern. In fact that was the only pattern that was recognizable in weekend. Based on this pattern it has target around 1.3250 - slightly higher than 5/8 Fib level. Thus, we also will get daily Agreement resistance at overbought and MPP. It should be nice level for attempt to go short:
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