Euro In free fall after ECB QE announcement

On Thursday, it was D-day for the ECB QE plan. Draghi and Co delivered a programme that fully lived up to expectations. The euro was sold across the board. A first move brought EUR/USD to re test the 1.1460 correction low. After the close of the European markets, the decline continued. EUR/USD filled bids in the 1.1316 area and closed the day at 1.3366, the lowest level in more than 11 years. Initially, USD/JPY didn’t profit much as risk-on sentiment was counterbalanced by a decline in core US/European bond yields. However, the pair regained traction later as the US equity rally gained further momentum. USD/JPY closed the session at 118.49 compared to 117.79 the previous day.

This morning, the positive equity sentiment also spilled over the Asia. So, for now there is no negative impact from the competitive devaluation of the euro against the likes of the yen or other currencies from export depended countries. The China HSBC manufacturing PMI was slightly better than expected.. USD/JPY set a correction top on global post ECB optimism early in Asia, but is off this high trading in the 118.30 area at the moment of writing. EUR/USD stays with reach of the correction low, changing hands in the 1.1330 area. EUR/JPY is testing the key 134.14 area. A break below this key level would be significant from a technical point of view. In this respect we are keen to see whether Asian/Japanese (equity) markets can maintain their positive momentum in the wake of the ECB QE move and the sharp decline of the euro. The ECB QE apparently also raises speculation that the RBA might be forced to cut rates further. AUD/USD dropped below 0.80. Almost all smaller European currencies (SEK, NOK, but also the likes of the PLN and the HUF) are recording substantial gains against the euro.

Today, the markets will look for the EMU PMI’s. An improvement is expected, both for the manufacturing and the services measure. We see upward risks to the consensus. What does this mean for the euro and for other markets in the post ECB QE world. In theory, this should be positive for equities. However, the reaction on the bond market and of the euro is less easy to predict. Probably a lot of investors still have to adapt positions in the wake of the ECB decision. In addition markets will also look forward to the Greek elections. Until now, markets aren’t too afraid of the outcome of the Greek elections even as Eurosceptic Syriza remains in the lead. It is treated as an isolated issue with little direct impact on the global picture for the euro zone. Interesting to see whether this calm will persist going in the election weekend and after an impressive risk on rally. In a daily perspective, we don’t try to catch the failing knife of EUR/USD even as technical indicators suggest that the pair is heavily overbought. A lot of investors are probably still wrong-footed by speed of yesterday’s decline. So they will try to limit the damage in case of an uptick. For USD/JPY we maintain a cautious bias. The ongoing downward pressure on yields in most industrialised countries may continue to cap the topside. In addition, at some point, Asian/Japanese equity markets might become nervous on the competitive declines/devaluations in the rest of the world. A risk-off correction for this or whatever other reason might bring the yen in the picture. In this respect, we look out how the test of EUR/JPY 134.00 fares. A break could be a first warning. The comparable range bottom in USD/JPY stands at 115.57. This level is still quite far away, but we keep an eye on it.

Cable drops below 1.50 on post-ECB euro sell-off

On Thursday, the UK data were ignored. EUR/GBP basically held a tight 0.7650/70 trading range in the run-up to the ECB decision. The ECB decision on QE also hammered EUR/GBP. The pair in a first move dropped to the 0.7570 area. At first cable was quite resilient to the EUR/USD decline. However, later in the session the pair tumbled to a new correction low below 1.5010. EUR/GBP ended the day at 0.757.

Today, the calendar in the UK contains December retail sales. A setback after the strong November report is expected. Other indicators from the retail sector were mixed of late. (CBI strong/BRC poor). We see slight downside risks to the consensus. If so, this move will probably in the first place affect cable. The performance of EUR/GBP will probably remain at the mercy of the gyrations in the euro. As is the case for EUR/USD, the pair is in oversold territory, but we don’t try to catch this falling knife either.