Once again, Draghi takes center stage

Another good week for the dollar comes to an end, with the greenback posting strong gains against most of its rivals. Generally speaking, US data was not encouraging enough, with only New Home Sales and weekly unemployment claims uptick, yet at the same time, there was no sign the economy has lost the growth pace seen lately. The week was thin on event risks, but ECB’s head, Mario Draghi surprise statement on monetary policies during an event in Lithuania was probably the most volatile event, as his words on being ready to ease more sent the EUR to sub 1.2700 levels against the greenback. 

Geopolitical risk with the US and Arabic allies attacking ISIS controlled refineries in the aims to disrupt extremist organizations had triggered some spikes of risk aversion across markets, favoring at least temporarily, both yen and gold. None of both however, was able to sustain gains, and point to close the week near multi-month lows. 

As for the upcoming week, it will be far more interesting, with European inflation and ECB, UK GDP readings, and US employment figures among others. Data should be critical for the longer term outlook, being a make it or break it for ongoing dollar bullish trend. 

Starting on Monday, the calendar will kick start with German inflation readings, expected slightly below 0.00% both year and monthly basis. Although not a surprise, the readings if negative, will add to market sentiment the EZ slowdown is just accelerating. On Tuesday, EZ inflation expected to tick down to 0.3% yearly basis and German employment figures will be the main events on Europe. An educated guess will be that if inflation actually hits 0.3% as market expects, there will be little market reaction ahead of upcoming news despite being at record lows. From there we will jump to ECB on Thursday: what will Draghi do?

The fact is that the ECB has launched a chunk of measures early September by cutting three main interest rates, including inter deposits one that was already negative, announcing to buy private-sector assets, to finally left doors opened for further easing if needed.  In the meantime, the first round of TLTRO was launched with a mild weak success in its first round. My take is that we are not going to see much news on October meeting, and that Draghi will go for a wait-and-see stance. I don’t believe even a weaker than expected EZ inflation will be enough to push his hand this month. 

Market reaction may be to continue pricing in an unclear-to-come QE, which will keep the EUR under pressure against most rivals, with Draghi getting closer to its target of a weaker currency to boost growth, without having to do much.

The UK deserves it’s all alone stance comment, despite the only relevant data next week will be GDP, expected slightly higher YoY basis, up to 3.2% from previous 3.0%. Dollar general strength will no doubts weight against the Pound if data misses expectations, but a strong reading there should be supportive of Carney’s words on a sooner than expected rate hike. The GBP/USD then, may not be the best pair to trade it you want to go with the USD, but will likely be the preferred choice if dollar gives any sign of weakness. 

Finally on Friday, the US will release its monthly employment report: August reading published early September was quite disappointing, falling well below this year average down to just 142K new jobs added by the economy. At the same time, unemployment rate stands at 6.1% within FED’s mandate, and is expected to remain unchanged, meaning market attention then will be focused on the main reading, expected around 203K and any possible revision of the previous month number. A number above 203K should trigger some dollar demand particularly against EUR, JPY and AUD, but it will take an up beating 230K or above to see a general dollar rally, sustainable in time.