The European Central Bank’s under delivery on the implementation of measures to raise inflation as quickly as possible sparked an aggressive appreciation of the Euro on Thursday. Market participants were left disappointed, with hopes of aggressive new measures dashed when the central bank decided to extend QE until March 2017, rather than increase it as anticipated.
For an extended period falling commodity prices have disrupted inflation growth in Europe, but this did not provide a compelling argument for the ECB to partake in an aggressive easing package to jumpstart inflation and growth in the Eurozone. Participants received another blow when deposit rates were cut by just -0.1% which compounded to the disappointment that resulted in an aggressive 3.3% appreciation in the EURUSD.
This disappointment trickled down to equity markets with the Asian equities falling to three week lows on Friday. With market participants still dissatisfied about the ECB’s decision, there exists a possibility that the selling contagion may drip down into the European and American arena in today’s trading session. Focusing on the FTSE100, the index was exposed to heavy declines on Thursday with prices clipping the 6200 support. If this downwards momentum holds, a break below 6200 should encourage sellers to send prices back towards 6100.
In the commodity arena, WTI Oil managed to bounce back from $40, which has been highly motivated by the unwinding of USD positions and has little to do with improved sentiment towards Oil. This commodity remains fundamentally bearish and the recurrent fears over the aggressive oversupply in the markets continue to haunt investor attraction. The concerns of a decline in global demand have obstructed most opportunities which the bulls have been presented with, and if the OPEC decides to leave supply unchanged then sellers may be encouraged to send prices towards $39.
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The main focus for today will be the NFP results which have the ability to fortify the optimism over the increased possibility of a US interest rate rise in December. The string of robust performances from the United States economy in November combined with the recent ADP of 217k has already provided a compelling reason for the Fed to raise US rates this year. If the NFP follows this pattern and exceeds expectations, then this may seal the deal for a US interest rate hike before 2016.
Currency spotlight GBPUSD
The GBPUSD has appreciated to weekly highs of 1.5158, which has been the result of temporary USD weakness and has little to do with improved sentiment towards the Sterling. The Sterling continues to suffer regular punishment from the Bank of England’s clear reluctance to begin raising UK interest rates, whilst a static inflation growth in the UK economy is diluting any pressure on the central bank to act. After such an aggressive fall in the GBPUSD over the past couple of days, temporary USD weakness did provide an opportunity for the pair to produce a relief rally. However, the GBPUSD remains both technically and fundamentally bearish and a strong NFP release on Friday may encourage sellers to send prices back towards 1.5000.
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Lukman Otunuga is a research analyst at FXTM
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