EURUSD sold off after ECJ positive comment on OMT program

Fundamental View

Yesterday’s session saw large pushes to the upside in equities and oil during European trading hours, leading to a risk-on sentiment filtering through negatively to the Safe-haven assets. We have seen a large move lower in T-notes, finding support at yesterday’s pivot area. This was then reversed as we saw the US session force the risk-on sentiment to reverse, allowing the S&P 500 to dip below the 2000 handle and Tnotes to break higher above the day’s range. We have seen the World Bank cut global growth targets overnight, comments which only served to compound the decline in global equities. Copper was also hit hard overnight, trading lower by 6% at its lowest level and closing lower by 5% on the Asian session. This is all due to a fall in industrial demand in China. Oil declined during the Asian session after API numbers printed a large build of 3900k barrels. The supply glut is set to increase as the US have pledged to increase production by 600k barrels per day in 2015. We are, however beginning to see the effects of lower oil prices as firms seek to focus on established wells rather than investing into explorative drilling. Opec have also restated their strategy, “testing the mettle of high-cost producers.” Looking at the push lower in oil on a global macro front, if oil moves lower to test $40bbl we are likely to see global disinflation for the medium term as falling energy prices drag down the headline numbers. Core inflation is likely to be less affected but the fall in prices are likely to filter down into other sectors.

Today’s View

Today we have seen the European Court of Justice comment on the legality of the ECB’s OMT programme. This has come in the wake of 2 years of debate within the Eurozone, with a judgement of illegality from the German court. As per legal procedure, the European Justice’s right to overrule a member state’s decision was enabled and the ECJ this morning stated that “The OMT programme is in line with EU law so long as certain conditions are met. The OMT is ‘in principle’ in line with the EU Treaty.” This has seen the EURUSD sell off after the announcement, trading lower from pivot to levels around the 1.1737 technical support. We have MBA Mortgage Applications due at 1200 and US Retail sales due at 1330. Retail sales, although predicted to fall lower, is the reading for December and as it straddles the Christmas shopping period we could potentially see a slight beat on the expected -0.1% headline, despite the seasonal adjustment. With regards to crude, we are likely to see further moves lower due to the DOE Crude Inventories number due at 1530 today. We have seen a push lower overnight but the API numbers came in very high with a build of 3900k. This is likely to weigh in on the DOE number due later.

Alternative View

Positive earnings results from the US heavyweights may outweigh on our strategy. It is recommended that traders remain alert and responsive to any earnings as they report.