Yesterday’s market action
We saw a beat on expectations on the Eurozone Inflation yesterday were unsurprising but better than expected with the core reading at 0.9% vs expected 0.7%. Whilst the potential missed payment on Friday, Grexit risk remains at the forefront of everyone’s minds. Although we saw an extension to the payment deadline it is still very much an unknown. Traders should be forgiven for assuming that this would have led to both Euro weakness and Bund strength; however the somewhat overlooked Eurozone Inflation data caused a steepening to the long end of the yield curve, thus driving price lower. We saw a 1.52% drop in the strength of the dollar index, led lower by the Euro’s gains against the greenback.
The strength in the Euro has since been removed as we heard minor negative headlines that Greek Prime Minister Tsipras will not meet Dijsselbloem. Following the posting of Eurozone retail sales this morning, posting 0.7% against the expected 0.6%, there was muted euro strength before we saw the EURUSD push lower towards the 1.1100 handle. This seems to be following the move lower seen in the GBPUSD move seen earlier from weak UK data. The large weakening in the pound stemmed from the UK Services PMI missed expectations with a reading of 56.5 against an expected 59.2. The GBPUSD fell to new lows on the day, breaking through the 1.5300 handle and finding support on the low of the 28th.
Today’s session
From a monetary policy front we have the ECB Interest rate decisions and press conference today; Mario Draghi is likely to be reaffirming the ECB’s position, reassuring sceptics of the amount of purchases and the fulfilment of the commitment made in March this year. This is the first meeting we will have after the announcement of potential frontloading over the summer months whilst sovereign debt is cheap. We saw Fed’s Brainard with moderately dovish commentary yesterday as she saw current available data suggests that there may be significant drag on the economy. This kept dollar bulls at bay in yesterday’s session but with the potential of further downside in the Euro this week off of Grexit risk and monetary policy commentary it is likely that we will see a return to mild dollar strength, much in the same way as we have seen this morning.
Ahead we have several key data points to provide trading opportunities. We have the ADP Employment figures released at 1315 BST, this is often used as a barometer for the Non-Farm Payroll figure on Friday but the correlation between these numbers broke down last month: a figure to be aware of but which may provide false signals moving into Friday’s session. We also have the US trade balance to contend with, expected at -$44bn. As we still have a comparatively strong dollar it is not expected that exports beat expectations this month and the number is likely to hold around or below the expected. We also have Services PMI and ISM Non-Manufacturing from the US expected at 56.4 and 57 respectively. The dollar is likely to be the exaggerated trade due to current geopolitical risk and any beats outside the indicative range will stimulate extensions in price action.
On the crude oil front last night saw API readings post a build of 1800k barrels. This increase in supply, coupled with both the OPEC meeting on Friday and the announced expansion of Iraqi oil by 100k barrels per day has allowed for a drift lower in price, with crude trading below the $60bbl handle. With a draw- down expected this afternoon, it is unlikely that this will be fulfilled and we will see a build on the headline, more in line with last night’s API. The gasoline number, once again, remains the figure to watch as we have seen consistent draw-downs in gasoline inventories off of higher retail demand. This seems to have tailed off this week as API Gasoline inventories showed a build of 1600k barrels but traders are reminded to remain cautious of this number.
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