The ECB further moves to attack deflation

Yesterday was another monumental day for the European Central Bank (ECB). This time, the ECB pulled off what must have been the most unexpected move of 2014 so far from any central bank. The ECB unexpectedly acted on multiple fronts, including cutting interest rates to a new record-low 0.05%, alongside raising negative deposit rates to 0.2%. Furthermore, Draghi even announced plans to launch an asset purchase programme.

Although the ECB stopped short of launching quantitative easing (QE) this time, if Thursday’s new stimulus measures prove unsuccessful, calls for QE will heighten. All in all the EURUSD declined by around 200 pips yesterday, while concluding trading at 1.2942.

Trading on Friday has commenced with further downside pressure on the pair, with the news that EU leaders are still looking to add further economic sanctions on Russia despite a ceasefire hopefully being reached, further weighing on the euro. To conclude, the EU economic sentiment has now reached another low point and as long as the markets react positively today’s US NFP, I see the potential for the pair to conclude at 1.28 today. I had priced in this move for the end of September due to an awareness of the Fed concluding QE in October, but downside momentum in the EURUSD has accelerated following yesterday’s ECB surprise.

Furthermore, it will now be interesting to pay attention to how the Swiss National Bank (SNB) reacts to the ECB’s decision with now only the USDCHF concluding Thursday at its highest value since July 2013 (0.9317) and the EURCHF reaching a near two year low (1.2065) on Thursday as well. The SNB have previously stated a desire for the EURCHF to consolidate around 1.20. Any downside movement below might open the door for unexpected CHF movement. Additionally, the last time the ECB acted (June) the Bank of Sweden also moved so perhaps volatility from the Scandinavian currencies is something to pay caution to.

Elsewhere, the GBPUSD concluded the day at its lowest close since February (1.6330) after the Bank of England (BoE) left rates unchanged last month. There seems to be suspicions among analysts that the upcoming Scottish referendum (raising fears of political instability) is encouraging bearish movement. However with two impressive UK economic results this week (UK Services and Construction PMIs both at multi-month highs) still encouraging downside moves in the Cable, I am still curious towards whether investors are just accepting that no matter impressive the UK fundamentals remain, the BoE will still refrain from raising rates.

Either way, the EURGBP teasing downwards moves back around the September 2012 lows (0.7887) will alert the BoE. The EU is the UK’s major trading partner and a rate rise from the BoE could harm UK export competitiveness and even further delay a BoE rate rise. With investors seemingly selling the GBP at the moment, as long as the markets react favorably to the US employment report, the GBPUSD is still at risk for further downside movement today. Potential support can be found at 1.6299 and 1.6271.

In regards to the USDJPY, the pair concluded trading at its highest close of 2014 so far, 105.257. Although the news that the Bank of Japan (BoJ) leaving stimulus unchanged last month led to initial signs of a USDJPY pullback, the USDJPY strengthened as Thursday progressed. Recent Japanese expenditure releases have shown a substantial decline in consumer expenditure, after the April sales tax. There are even fears of a potential period of stagnation in Japan, and this is causing unease among investors.

Although the BoJ remain confident that its monetary goals remain achievable and no further stimulus is required, a continuation of negative Japanese data will raise suspicions that the BoJ to add more stimulus in the coming months. This is weakening the JPY.

Finally, there were signs of a “risk on” attitude in the markets following the ECB’s surprise card, which resulted in the AUDUSD appreciating as high as 0.9391 on Thursday. The pair then concluding trading at 0.9347. This will alarm the Reserve Bank of Australia (RBA) who only as recently as Monday evening again reiterated that the AUD remained overvalued, which was hindering the Australian economy transition away from mining investment. Further signs of a possible risk on period in the market, appreciating the Aussie should result in even more attempted jawboning from the RBA.