08 September 2016 at 11:25 GMT
Today's session is one of quiet coiling as the euro and other, related assets await the latest from the European Central Bank at 1145 GMT. Markets appear to be riding the fence on this meeting, with the dominant consensus forecasting no real change while others citing the ECB's mention of a "major policy assessment" as a possible hint at the scale of today's offerings.
Beyond the big bank, WTI crude ripped upwards yesterday as the API inventories print showed a larger-than-expected drawdown. Oil traders will look to today's EIA numbers to lock down this possible large support for the rally in light sweet crude.
- ECB Interest Rate decision (1145 GMT)
- ECB Draghi post rate decision conference (1230 GMT)
- US Initial Jobless Claims (265K exp., 1230 GMT)
- US Weekly DOE Oil Inventories (1500 GMT)
EURUSD: Ahead of the ECB meeting, EURUSD has been on a continuous rally since the start of the European session this morning. We had only briefly been above the 1.1264 (100-week moving average) yesterday before being strongly rejected, but today this is now forming the base ahead of ECB.
1.1308 is a small technical resistance level (Fibo level 76% from drop starting August 18). 1.3665 is a key technical resistance.
We should preferably not close above this level on the day. Also as we approach the weekend, a close above the 1.1264 area would cross the 100-week MA upwards, and if a clear cross then would be first since August 2014 (in August 2016 we did actually close a whisker higher on weekly charts).
To the downside we see the first decent tech support at 1.1209 (100-day moving average and also 38% Fibo level from same drop starting August 18)
GBP: the squeeze on sterling shorts stopped short of the key 1.3480/1.3500 resistance lately and posted a local bearish reversal that could mean a test of 1.3250/00. GBPUSD is finding support around 1.3350/60 which was the defining point for GBPUSD's attack on the recent highs. EURGBP likely to see the most volatility over the ECB today – 0.8500 is the next resistance there. AUDUSD: High-yielders are enjoying the day with AUD enjoying Chinese trade data. AUDUSD has not closed above 0.7700 since April. Above recent highs of 0.7756, it opens to the final 0.7835 high of the year.
FX Options volatilities
EURUSD vols are very bid this morning ahead of ECB. Despite spot a bit higher this morning and moving against RR we have seen the ATM curve getting paid up, so definitely some last-minute panic buying of gamma protection ahead of the ECB.
One-month EURUSD was trading at 7.15 this morning and now at 7.4 and overnight is now at 17 vols. No bigger policy change is expected at this ECB meeting, but overnight EURUSD vol at 17 is pretty much in line with the average vol looking at the last five ECB meetings.
Vols in JPY and other non-EUR currencies have been smalls offered so far today.
The bond rally has paused before the statement from the ECB later this afternoon. Expectations are mixed, with most looking for a possible extension of existing programmes. Anything beyond this, including amendments to the criteria of purchases and interest rate cuts, would constitute a major surprise and most likely see a spike in risk sentiment.
The reaction in European government markets is a little more difficult to foresee, as amendments to purchases could have a huge impact on individual markets (such as changes to capital keys favoring peripheral markets would see German bunds tumble while Spain and Italy would jump).
The FTSE 100 gained 0.5% to 6,879 while CAC 40 tacked on 0.1% to 4,563. Pressure mounts on ECB to do QE3, but it’s a close call. Investors have become increasingly convinced the ECB will extend its asset-buying program beyond March 2017, but there’s still question as to whether such a move will be made today.
European banks were on the move this morning with Deutsche Bank trading up 1%, while BNPP gained 0.8% and Banco Santander rose 1.3%. Italy’s Banca Monte dei Paschi di Siena was up 4.1% after a ratings update to equal weight from underweight at Morgan Stanley.
Micro Focus shares was another strong mover today. The stock jumped 21% after Hewlett Packard said it will spin off and merge its software operations with those of the British company in an $8.8 billion deal.
Dixons Carphone added 2.8% after the electronics retailer posted a 9% quarterly revenue rise and said consumer behaviour in the UK hasn’t yet been affected by the Brexit vote.
ASML NV fell 1.6% after Samsung Electronics Co. said it plans to sell shares in the chipmaker, which is a supplier to Apple Inc.
The replay of our Morning Call can be found here
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It's down to Draghi now. Photo: iStock
— Edited by Michael McKenna