Draghi lays the groundwork for increasing QE

ECB President Draghi sent EUR lower yesterday as he announced that the worsening economic outlook (they downgraded their growth and inflation forecasts) and market turmoil had increased the downside risk and as a result, they were increasing the limit for buying individual bonds to 33% of each issue from 25%. The move is not entirely unexpected; the original QE announcement said that “the limit will initially be set at 25% for the first six months of purchases and subsequently reviewed by the Council.” The announcement does not mean any immediate increase in the ECB’s purchases, as it isn’t even close to hitting this limit yet. However, the move does free up room in case the Council decides to expand or extend the QE program. And in fact Draghi did confirm that the “horizon, size and parameters of QE” can all be adjusted.
Draghi noted several times the problems in EM, which he said “have the potential to further affect growth.” He may have been warning us that if conditions worsen, the ECB could act at the next meeting (Oct. 22nd) or the one after that (Dec. 3). Falling commodity prices, weaker EM currencies that make it harder to repay USD-denominated debt, or a further slowdown in EM growth rates are all points to watch, in my view.
In any event, Draghi’s comments were exactly the kinds of hints about possible future actions that we were looking for and it was no surprise that EUR weakened as a result. I expect it to weaken further as more and more investors use EUR as a funding currency.
US employment report in the spotlight: The main event today is the US employment report for August. This could be the most important employment report of the year, in our view, since it’s the last one ahead of the September FOMC policy meeting and may determine whether they raise rates at that meeting. NY Fed President Dudley said on Aug. 26th that the case for a September rate hike has become less compelling following the recent panic in equity markets. However, he added that a hike could become more compelling by the time of the meeting as they get additional information about the state of the economy. Therefore, a strong employment report, coming after the recent upward revision to the Q2 GDP figure, could bring forward expectations of a September hike, which would probably boost the greenback across the board.
The report is expected to show a 217k increase in nonfarm payrolls, slightly above the 215k print in July. Another reading above 200k would suggest that the US labor market is still gathering momentum despite the recent turmoil in China and the collapse in equity markets worldwide. The unemployment rate is forecast to have declined to 5.2% from 5.3% while average hourly earnings are expected to rise 2.1% yoy, the same pace as in the previous month.
However as we pointed out yesterday, August has been the least reliable month for the NFP data in recent years. Not only has August been the weakest month for NFP, it also has around twice the average revision (76k vs the average 41k, or 38k if we exclude August). What this may mean is that if the figure is weak, the market will make excuses for it, while if it’s strong, the market will take it as increasing the likelihood of a rate hike this year. That gives us asymmetric risk to the figure today. In any event, yesterday’s non-manufacturing ISM employment index for August stayed relatively high at 56.0, which combined with the ADP estimate of 190k jobs added suggests that the market consensus estimate is achievable.

Other indicators: As for the rest of the indicators, Germany’s factory orders are expected to have fallen 0.6% mom in July after rising 2.0% mom in June. French consumer confidence for August is also coming out.
In Canada, the unemployment rate for August is expected to remain unchanged at 6.8%. However, the net change in employment is expected to show a 5.0k decline, after a 6.6k increase in July. Following the recent plunge in oil prices and the reluctance of investors to push CAD higher after the better-than-expected GDP data
On Tuesday, I would expect the currency to come under additional selling pressure at the release.
Besides the indicators, Finance ministers and central bank chiefs from G-20 nations meet in Ankara, Turkey. They will hold discussions on coordinating policy responses to financial market risks including slowing Chinese economy, Greece’s debt turmoil and possible Fed tightening.
We also have four speakers scheduled on Friday. During the Asian morning, Minneapolis Fed President Narayana Kocherlakota repeated his usual calls for the Fed to refrain from hiking rates this year. No surprise there. During the European day, we have speeches from Richmond Fed President Jeffrey Lacker, ECB Governing Council member Ewald Nowotny, and Riksbank Deputy Governor Skingsley.

The Market

EUR/USD plunges after Draghi’s remarks

EUR/USD plunged on Thursday after Draghi’s comments at the press conference following the ECB policy meeting. The pair fell below the support (now turned into resistance) barrier of 1.1165 (R1) and hit support slightly above the 1.1075 (S2) line. As long as the rate is trading below the uptrend line taken from the low of the 7th of August and below the downtrend line drawn from back the peak of the 24th of August, I would still see a negative short-term picture. I believe that a break below 1.1075 (S2) would extend the near-term downtrend and perhaps open the way for the 1.1020 (S3) zone. The MACD stands below both its trigger and signal lines and points down, indicating downside momentum. Nevertheless, the RSI rebounded from slightly above its 30 line, raising concerns that a minor corrective bounce could be looming before the next negative leg.
As for the broader trend, given that on the 26th of August EUR/USD fell back below 1.1500, I would hold my neutral stance. The move below that psychological hurdle confirmed that the surge on the 24th of the month was a false break out. Therefore, I would like to see another move above 1.1500 before assuming that the overall outlook is back positive. On the downside, a break below the 1.0800 hurdle is the move that could shift the picture to negative.
Support: 1.1110 (S1), 1.1075 (S2), 1.1020 (S3)
Resistance: 1.1165 (R1), 1.1200 (R2), 1.1260 (R3)

USD/JPY breaks below 119.20

USD/JPY tumbled on Thursday, and today during the early European morning fell below the 119.20 (R1) hurdle. As long as the rate is trading within the downside channel that has been containing the price action since the 28th of August, I would consider the short-term trend to be negative. I would expect the move below 119.20 (R1) to aim for the 118.75 (S1) support line. Another break below that line could see scope for extensions towards 118.25 (S2). Our oscillators detect negative momentum and support the notion. The RSI slid after hitting resistance slightly above its 50 line, while the MACD, already negative, has topped and fallen below its trigger line. As for the broader trend, the plunge on the 24th of August signaled the completion of a possible double top formation, which probably shifted the medium-term picture negative.
Support: 118.75 (S1), 118.25 (S2), 117.00 (S3)
Resistance: 119.20 (R1), 120.65 (R2), 120.70 (R3)

GBP/USD breaks below 1.5250

GBP/USD continued falling yesterday, breaking below the support (turned into resistance) hurdle of 1.5250 (R1). The price structure on the 4-hour chart still suggests a downtrend, therefore I would expect the negative move to continue and perhaps challenge the 1.5185 (S1) support, defined by the low of the 5th of June. Our short-term momentum indicators support the notion as well. The RSI just fell back below its 30 line, while the MACD, already negative, looks ready to move below its signal line. As for the bigger picture, the collapse on the 26th of August brought the rate back below the 80-day exponential moving average. What is more, the move below 1.5330 confirmed a forthcoming lower low on the daily chart. In my view, this shifts the overall outlook cautiously to the downside.
Support: 1.5185 (S1), 1.5090 (S2), 1.5000 (S3)
Resistance: 1.5250 (R1), 1.5330 (R2), 1.5410 (R3)

WTI hits resistance at 48.40 and tumbles

WTI traded higher yesterday, but hit resistance at 48.40 (R2) and then tumbled to fall back below 47.00 (R1). Since the price is still trading below the uptrend line taken from the low of the 26th of August, I would still see a negative short-term picture and I would expect the decline to continue and initially aim for the 45.70 (S1) line. A break below that barrier could extend the decline perhaps towards the 44.70 (S2) zone. The RSI stands near its 50 line but points sideways, while the MACD, although positive, lies below its trigger line and points down. This supports the case that WTI could trade lower in the short run. On the daily chart, I still see a longer-term downtrend. As a result, I would treat the 26th – 31st of August advance as a corrective move of that major downside path.
Support: 45.70 (S1), 44.70 (S2), 43.40 (S3)
Resistance: 47.00 (R1) 48.40 (R2), 49.30 (R3)

Gold continues lower and breaks below 1128

Gold continued trading lower and managed to fall below the 1128 (R1) support (now turned into resistance) barrier. I would now expect the metal to continue lower and perhaps challenge the next hurdle at 1118 (S1), where a break is likely to open the way for the 1110 (S2) zone. Our short-term oscillators detect negative momentum and amplify the case for further declines. The RSI edged lower, but found support slightly above its 30 line. The MACD stands below both its zero and signal lines. The fact that the RSI rebounded from near its 30 line makes me believe that a short bounce could be looming before the bears prevail again. As for the bigger picture, with no clear trending structure on the daily chart, I would hold my neutral stance as far as the overall outlook is concerned.
Support: 1118 (S1), 1110 (S2), 1105 (S3)
Resistance: 1128 (R1), 1135 (R2), 1146 (R3)