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European Central Bank vs Federal Reserve

27th October 2015 by | Trader's Desk | No Comments

Two of the largest economies are facing the biggest decisions of 2015, one preparing to ease monetary policy further, one preparing to tighten monetary policy, but what is the final factor and who will react?

The European Central Bank’s Mario Draghi in his press conference has almost guaranteed a second wave of stimulus for the Euro area in December of this year. December is also the next potential meeting that Fed Chair Yellen could raise interest rates in the US for the first time since 2006. We’ve known for a while, 2 of the world’s largest central banks are pulling monetary policy in opposing directions, however acting in the same month could send EURUSD to a new low.

December, historically a low volatility month, could potentially have the 2 biggest policy changing decisions of 2015 to end the year with a bang for the various financial markets.

A summary of what we know

  • Low Oil prices and EURUSD trading around 1.1700 (high of 6month range) counteracts the European Central Bank’s stimulus program
  • Pressure and volatility surrounding China and the already strong dollar has delayed the Fed hiking already

What’s happened recently?

  • After the dovish September FED meeting, EURUSD traded near the high of its 6month range, threatening European inflation making exports more expensive.
  • After ECB QE2 announcement, EURUSD traded to a 2 month low, making the dollar stronger and could influence the Fed’s thinking on monetary policy to delay further.
  • Global equities have continued to rally, oil prices have dropped to below $50 a barrel.

What are the possible outcomes?

  1. The Fed hike in December
  2. The Fed don’t hike in 2015, due to a strong dollar, push back forecasts, sending EURUSD higher, forcing the ECB to act.
  3. ECB ease further in December
  4. ECB cap euro strength after a Fed hike by cutting the deposit rate further
  5. The continued rally in global equity markets gives the Fed a cover to hike rates

The outcome either way will be a split in transatlantic policy or a united extension of “easy money”.

EURUSD currently trading around 1.1050, with a latest Fed meeting schedule for released tomorrow at 6:00pm UK time.



Technical and Fundamental view of the Aussie

20th October 2015 by | Trader's Desk | No Comments

aussie_dollarThe uncertainty surrounding the monetary policy of the world central banks has seen the Aussie (Australian Dollar) rally in the last couple of weeks. The Federal Reserve remains to hold rates, The EU and Japan have undertaken further QE and the Bank of England has eased monetary policy, increasing the demand for the commodity currencies.

A statement from RBS highlights the fears the global economy face surrounding ‘QE Infinity’, an ‘open-ended’ easing program which has no set size and duration. The recent GDP print from China was also favorable to Australia, better than expected at 6.9% with a 6.8% forecast (although a miss on the 7.0% target).

Aussie_captureOn the swing side, this flow of money into Australia is causing an appreciation in the AUDUSD which is detrimental to the already sluggish Australian economy. An appreciation in their currency is causing a decrease in demand for manufacturing, education and tourism, the 3 standalone lights in a stagnating economy (outside mining). Continuing strengthening of the AUDUSD would increase the chance of a rate cut at the next meeting. 3,10 and 20 year government bonds have slipped, increasing demand and the chance of a rate hike currently stands at 28%.

At the October 6th meeting it was announced that the economy is ‘stabilizing in markets outside mining’ and that ‘’the Bank had not changed its view of the economy significantly, and arguably it now had greater confidence in the continuing moderate expansion of the economy with the removal of the qualifier “most of” when describing information suggesting a moderate expansion.”
Technically I see AUDUSD trading to 0.7614 in the medium term. If this was to happen quickly, a cut could become far more likely and so a sharp and hard pullback could be seen should this occur. Levels to watch on the way up are 0.7420-50 and 0.7580.