EUR/USD falls ahead of ECB, Nasdaq ponders make-or-break moment: European open

Asian Indices:

• Australia's ASX 200 index fell by -60.3 points (-0.88%) and currently trades at 6,794.00
• Japan's Nikkei 225 index has fallen by -580.95 points (-1.86%) and currently trades at 30,688.97
• Hong Kong's Hang Seng index has fallen by -94.47 points (-0.55%) and currently trades at 16,990.86
• China's A50 Index has fallen by -5.31 points (-0.05%) and currently trades at 11,753.33

UK and Europe:

• UK's FTSE 100 futures are currently down -41.5 points (-0.56%), the cash market is currently estimated to open at 7,372.84
• Euro STOXX 50 futures are currently down -40 points (-0.98%), the cash market is currently estimated to open at 4,033.35
• Germany's DAX futures are currently down -129 points (-0.86%), the cash market is currently estimated to open at 14,763.18

US Futures:

• DJI futures are currently down -73 points (-0.22%)
• S&P 500 futures are currently down -27.25 points (-0.65%)
• Nasdaq 100 futures are currently down -158.25 points (-1.09%)

RBA governor dampens hike expectations

The new RBA Governor Michelle Bullock seems to be treading a familiar path most incoming central banks seem to take, which is learning on the job about the importance of communication. Her comments heading into yesterday’s inflation report seemed to make it a slam dunk that hot inflation would equate to a hike. Which is why markets repriced and economists revised their forecasts for one or two more RBA hikes this year. Yet her comments today have seen these revisions reversed, in saying that the RBA are still considering whether CPI was a “material” change to their outlook and remain undecided as to whether they’ll hike in November. And with US yields rising, China’s markets failing to remain bid over stimulus and US futures pointing lower in Asia, it allowed AUD/USD to hit a new YTD low.

Today has a make or break feel ahead of ECB

We enter today’s European session quite unsure of how this could play out. Several key markets are at our around key levels, and that usually means we’re a few ticks away from either all out carnage or a reversal of fortunes. I suspect the ‘binary feeling’ of Asia’s price action foreshadows today’s ECB meeting, even if ECB President Lagarde ignored the ECB’s quiet period yesterday to waggle her hawkish stick on the eve of today’s monetary policy announcement.

Events in focus (GMT+1):

• 13:15 – ECB interest rate decision, monetary policy statement
• 13:30 – US GDP preliminary, PCE prices, consumer spending, jobless claims
• 13:30 – Canada average earnings
• 13:45 – ECB press conference
• 15:15 – ECB president Lagarde speaks

It seems more than likely that the ECB will hold rates, and lean towards the dovish side. Even though Lagarde yesterday warned that the ECB are ‘far from done’. Economic data and the risks surrounding the Middle East conflict simply do not present a compellingly hawkish case. But you never, perhaps the ECB will surprise with a hawkish twist and support the euro.

Otherwise, US bond yields and the performance of Wall Street likely dictates sentiment heading into the weekend. With tech stocks finally taking notice that all is not well in the world, it has a long way to fall and send ripples else where as it does.

US GDP is the second release, so I’m not expecting anything compelling. Also note that the ECB hold their press conference and Lagarde is also hitting the wires once more.

Of course, headline risks from the Middle East conflict remain in place and can sway sentiment.

• 1-day implied volatility has expanded for USD/JPY, EUR/USD and NZD/USD
• USD/JPY is trading at a 1year high since breaking above 150 and coming close to 150.50
• Volatile moves to the upside from here increases the risk of FX intervention from the BOJ

Nasdaq 100 technical analysis (daily chart):

The optimist in me says that the decline from the July high is corrective, and that the correction may be nearing completion. Yet if I stand back I also notice that each leg lower has increased with bearish momentum. Prices are also clinging on to the 14,220 support level after gapping lower, which leaves me wondering if we’ll see that I call the ‘dripping candle’ effect as prices plunge and leave a trail of increasingly large bearish gaps.

Perhaps I am being over-sensational. But it does feel like tech stocks finally got the memo that all is not well in the world. And with the Nasdaq clinging to support whilst traders brazenly bid USD/JPY above the infamous 150 level, it certainly has a make or break feel about it. And if the BOJ intervene and send USD/JPY plunging, I suspect risk assets such as the Nasdaq and AUD/USD will quickly follow.

EUR/USD technical analysis (daily chart):

It appears that EUR/USD did indeed complete its ABC correction around the 1.07 resistance zone. And with US yields rising alongside the dollar and the prospects of a dovish ECB hold, the potential for a lower euro seems plausible. The 1-day implied volatility level suggests a closing range between 1.0488 and 1.0602, with the 1-week implied volatility sitting beneath its YTD low.

Even if EUR/USD moves higher today, I would feel inclined to seek bearish setups below 1.0700.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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