ECB in focus next week – how much dovishness is already priced into the Euro and DAX30?
Economic Events July 22 – 26, 2019
Source: Economic Events Calendar 22 – 26, July 2019 - Admiral Markets' Forex Calendar
DAX30 CFD
The German index finds itself in a very interesting spot in the upcoming days, especially with the ECB rate decision coming next Thursday.
In our opinion, there is increasing indication that the ECB will deliver a dovish statement overall in the press conference (please find details on that in the Euro paragraph below).
But after the DAX30 CFD dropped below 12,300 points last Wednesday, and couldn't recapture that level after rumours hit the wire on Thursday that the ECB is studying its inflation goal last Thursday, we become more and more sceptical, presuming the next move to be down instead of up.
Technically, the key level can still be found around 12,150 points. As long as the bulls can keep the German index above that level, chances are still given that we get to see another attempt to break above 12,650 points.
But if the ECB fails to deliver enough fuel for such a break higher and the DAX30 CFD drops below 12,150 points, the German index vulnerable to a test and drop below 12,000 points.
Though, we should keep in mind that significant volatility within the black out period of the Fed and waiting for their rate decision next week on Wednesday, is limiting the downside potential with bulls seeing historically a window within which Equities usually perform solid, increasing chances that the DAX30 CFD will minimum hold above 12,000 points:
Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD daily chart (between April 10, 2018, to July 19, 2019). Accessed: July 19, 2019, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2014, the value of the DAX30 CFD increased by 2.65%, in 2015, it increased by 9.56%, in 2016, it increased by 6.87%, in 2017, it increased by 12.51%, in 2018, it fell by 18.26%, meaning that after five years, it was up by 10.5%.
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US Dollar
Our outlook for the US dollar hasn't significantly changed over the last week of trading and our last weekly market outlook.
Still, the USD Index Future presents itself very stable, mostly due to the current weakness in the Euro (which has a weight of 58% in the basket against the dollar).
And if our sceptical view on the Euro plays out next week, driven by a potentially dovish ECB (further details in the paragraph below), it wouldn't come as a surprise to see the USD going for another test of the region around 98.00 points.
But USD bulls should be very careful, since any such USD strength could be short-lived. The reason can be found in the Fed Watch Tool and the rising speculation of a 50 basis point rate cut by the Fed on July 31.
These speculations were given new fuel Thursday, when NY Fed president Williams said in a speech "to take swift action when faced with adverse economic conditions" and "keep interest rates lower for longer", comments which were interpreted as uber-dovish and pushing the probability of a 50 basis point rate cut from the Fed on July 31 to nearly 70% after it was 0% on the 5th of July (thanks to solid NFPs).
Several hours later, these comments were put into perspective and it was said that they were only academic and based on research. Still, the probability of a 50 basis point cut didn't push back significantly below 50%.
That said and if we combine that speculation and the current USD performance with the stabilisation of 10-year US yields above 2% over the last weeks, it seems in our opinion as if the market is at least not yet pricing in such a realistic deep-rate-cut-scenario.
Or, to put it differently: if the US dollar goes up thanks to a weak Euro, it must come down.
Technically, the picture in the USD Index Future stays neutral between 95.00 and 98.00 points, but a significant test of 95.00 seems, in the weeks to come, especially after the Fed, likelier than a break above 98.00:
Source: Barchart - U.S Dollar Index - Weekly Nearest OHLC Chart (between May 2016 to July 2019). Accessed: July 19, 2019 at 10:00pm GMT
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Euro
The main event of this week will surely be the ECB rate decision respectively press conference with Mario Draghi on Thursday.
Last Wednesday, ECB board member Coeure said that the ECB is ready to act if necessary to help inflation move towards its aim of close to but below 2% in the eurozone, following not very promising economic data from the biggest European economy, Germany.
Here, on Tuesday, the ZEW economic sentiment indicator printed at -24.5, worse than the score of -22.3 expected. The current state of the economy indicator fell 8.9 points to give a reading of -1.1, also significantly below expectations which was 5.0.
That said, it seems very likely that the used rhetoric in the ECB statement and from ECB president Draghi in the upcoming press conference will be quite dovish and very likely levelling the path to a rate cut of the main refinancing rate below 0.
The only question seems: "Will such a dovish rhetoric result in a push lower in the Euro, especially against the US dollar?"
In fact, there are more and more hints of such a dovish stance: e.g. ECB member Visco said on July 12 that the ECB would need to adopt further expansionary measures if the EZ economy does not pick up, adding that it would consider its options "in the coming weeks" or rumours saying that the ECB is studying its inflation goal last Thursday.
That said, it could be that most of a dovish ECB is already priced into the Euro and the reason for the test of the region 1.1200 over the last days.
Still, if we get to see a drop below 1.1180/1200, further dynamic lower with a target around 1.1100 is very likely.
On the other hand, a move back above 1.1300 could level the path back up to 1.1400 and here making a re-test of 1.1450/1500 possible:
Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between April 20, 2018, to July 19, 2019). Accessed: July 19, 2019, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2014, the value of the EUR/USD fell by 11.9%, in 2015, it fell by 10.2%, in 2016, it fell by 3.2%, in 2017, it increased by 13.92%, 2018, it fell by 4.4%, meaning that after five years, it was down by 16.5%.
JPY
With the economic calendar being quite thin in the days to come and thus no big moves in US Treasury yields to be expected, we are a little sceptical whether today's data can really trigger any kind of volatility.
Even though, the comments from NY Fed president Williams on Thursday, "to take swift action when faced with adverse economic conditions" and "keep interest rates lower for longer" which were interpreted as uber-dovish and pushed the probability of a 50 basis point rate cut from the Fed on July 31, to nearly 70% after it was 0% on July 5 (thanks to solid NFPs), should be kept in mind.
With the break below 107.50 in the USD/JPY into Thursday's NY close, the path down to 106.80 and even lower to new yearly lows was already levelled into the weekly close, even though after the remarks of Williams were put into perspective as academic and based on research several hours later helped to stabilise the yield-sensitive currency pair.
Still, with the FOMC blackout period starting last Saturday, on July 20, we tend to see volatility staying subdued in the days to come.
Technically, the main focus on the downside on a daily time-frame can clearly be found on 106.80, where a break lower would activate the current yearly lows around the January Flash Crash lows around 105.00:
Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between April 20, 2018, to July 18, 2019). Accessed: July 18, 2019, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2014, the value of USD/JPY increased by 13.7%, in 2015, it increased by 0.5%, in 2016, it fell by 2.8%, in 2017, it fell by 3.6%, in 2018, it fell by 2.7%, meaning that after five years, it was up by 4.1%.
Gold
The fundamental and technical picture in Gold didn't significantly change over the last week and since our last weekly market outlook, even though the Fed Watch Tool shows an increasing chance of market participants seeing a rate cut of 50 basis points.
This expectation was mainly driven by some very dovish comments from NY Fed president Williams at a speech on Thursday.
Here, Williams pointed out "to take swift action when faced with adverse economic conditions" and "keep interest rates lower for longer" which let the probability of a 50 basis point rate cut from the Fed on July 31 to push up to nearly 70% after it was 0% on July 5 (thanks to solid NFPs).
As a result, Gold pushed to new yearly highs and above 1,440 USD, even though a follow through wasn't seen after the remarks of Williams were put into perspective as academic and based on research several hours later.
With the economic calendar being thin over the next days and the Fed rate decision in the next week, meaning that we currently find ourselves in the "blackout period" since last Saturday, we don't see much volatility in Gold and the precious metal to stabilise between 1,400 and 1,440 USD, probably with a slight bearish short-term tendency and drift lower.
Nevertheless, when looking at the bigger picture, we consider another push higher very likely with a first target to be found around 1,480/490 USD:
Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between April 20, 2018, to July 19, 2019). Accessed: July 19, 2019, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2014, the value of Gold fell by 1.7%, in 2015, it fell by 10.4%, in 2016, it increased by 8.1%, in 2017, it increased by 13.1%, in 2018, it fell by 1.6%, meaning that after five years, it was up by 6.4%.
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