ECB to Signal but Not Cut

Risk-On in Heat Wave

News that policymakers in the US have struck a deal to increase the $22tn debt ceiling was viewed as a risk positive by equity markets. The deal reduced the risk of a default and increased the likelihood of fiscal stimulus. Combines expectations of upbeat earnings results this week Asia equities were green across the board, however broader macro safe-haven trades did not soften.Reaction to current earning season has been muted as Tech shares led the S&P 500 higher. EURCHF has reached critical psychological support of 1.1000. At this point, there has been no signal from the SNB as to their strategy. The market is moving cautiously but continues to push CHF higher. With a lack of 1st tier data markets will be watching events in the UK. Boris Johnson is expected to become the UK next prime minister today. However, this provides zero additional clarity into his strategy to execute Brexit and his "do or die" pledge to deliver Brexit. We remain negative on the GBP outlook as we suspect that new Prime Minister Boris Johnson will drive towards no-deal exit from the EU rather than negotiate sticky points. Finally, Bitcoin fell below $10k as expectations for Fed interest rates cutes (debasing of US dollar) has been reduced. Increasingly we see the “king” of crypto as a gauge for Central bank's monetary policy. US existing home sales and the Richmond Fed index are expected, but none of them will shift market direction.

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ECB to Signal but Not Cut

This Thursday ECBs governing council will signal a willingness to ease further. However, there are numerous agreements for a proactive 10bp to 20bp deposit rate cut. We have still expected the first cut of 10bp in September. ECB Chief Economist Philip Lane comment that ECB needs to move "proactively" to an inflation rate that was too low. Yet, there is a growing resistance to negative interest rates despite weak economic data. Banks, companies and private households are hurting with long-term damage unknown. Generally, the ECB has acted in reaction to a crisis. But with an unemployment rate of 7.7% Europe is far from crisis levels signaling to financial markets that extreme policy is necessary would be counterproductive. For Thursday we are likely to also hear of the ECB plan to introduce tiered inters rates, so entities that are affected can be micromanaged. Official central bank rates will likely only apply to a portion of a deposit and select entities. Limits to the usefulness of rate cuts, the assumption has grown that the ECB might restart bond purchases. Although this strategy is questionable without an additional deterioration in the economic situation. Also, ECB will be hesitant due to volume limit rules which can’t breach 33% of the outstanding volume of an individual bond. Regardless, the market is expecting ECB dovish skew by selling Euro across the board. EURUSD clear 1.1200 support, with bearish extension likely to reach 1.1107(2019 low).