ECB May Jam The Brakes This Week

Draghi may lower expectation on policy tightening, sell EUR/USD?

Dollar strengthened after weak NPF, as news reported ECB may delay QE tapering plan

US dollar surprisingly edged higher against a basket of currencies, especially euro, after disappointing US jobs data last Friday. Such reaction is contributed by news released minutes after NFP that ECB may not have the final QE exit plan until December. A weaker euro pushed dollar higher.

Let’s have a look at US jobs report first. US labour department data showed nonfarm payroll increased by 156,000 last month, way below expectation of 180,000. The unemployment rate rose to 4.4% from previous 4.3%. We must take note Hurricane Harvey had no real impact on August jobs numbers because the survey was conducted before the storm. The hurricane's impact is likely to show up in a few weeks in initial jobless claims. In other words, September’s payroll could be worse and it is highly likely August’s final numbers will be revised lower when US labour department releases September’s payroll data in early October.

The lack of wage growth is confusing Fed since the unemployment rate is so low. Fed may hesitate to raise interest rates when they meet later this month. We think the possibility to move the rate this month is equal to zero.

Next, let’s go to ECB as they will hold their policy meeting this week. A few months ago, ECB said it would announce changes to its assets purchase program in autumn (which means in September or October meetings), pushing euro to rally 13% against dollar since the start of the year. Now the Governing Council will hold its first formal talk this week on the pace of asset purchases after December, when the current program is scheduled to expire, Bloomberg reported. We think the rapid gains of euro against dollar are worrying a growing number of policymakers at ECB. Pressure is building up for a slow rather than a rapid reduction in assets buying. Concern on the strong euro dampening inflation and hampering exports growth has increased.

Hence, there is a high chance ECB will lower markets’ expectation on policy tightening this week. Such action could push euro lower in near term.

Our Picks

EUR/USD – Slightly bearish.

Likelihood of a dovish ECB this week could pressure this pair lower towards 1.18 before its meeting.

 

USD/JPY – Slightly bullish.

Market could have been a bit overreacted on North Korea’s hydrogen bomb launch over the weekend. We expect this pair to climb towards 110.20 when markets’ jitters calm down.

 

XAU/USD (Gold) & XAG/USD (Silver) – Slightly bearish.

We expect gold price to retrace towards 1320 this week.

 

Similarly, we expect silver price to retrace towards 17.60.

 

Top News This Week (GMT+8 time zone)

Australia: GDP q/q.  Wednesday 6th September, 9.30am.

We expect the number at 0.6% (previous figure was 0.3%).

Euro Zone: ECB monetary policy decision.  Thursday 7th September, 7.45pm.

We expect ECB to hold the rate unchanged at zero. The key focus in this meeting is whether ECB will lay out any plan on QE tapering.  (previous policy rate was zero).