FOMC disappoints, as markets turn to Draghi
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Fresh from absorbing another FOMC disappointment, markets are clinging onto ECB President Mario Draghi?s remarks last week that ?within our mandate the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.?
It didn?t take too long for those remarks to be put to the test, with the Bundesbank releasing comments from an interview conducted on June 29th with its President Jens Weidmann, yesterday to announce that it remained opposed to any breach of the ECB mandate, with respect to funding for governments, and maintenance of price stability.
In so doing it appeared to plant a stake firmly in the ground by saying ?we are the largest and most important central bank in the Euro system and we have a greater say than many other central banks in the Euro system?
This was followed by a succession of German politicians lining up to oppose the granting of a banking licence to the ESM, if and when, it becomes available in September.
Having raised the bar so high in terms of expectation, it remains uncertain how the ECB President will be able to deliver on his promise without some form of climb down by the Bundesbank.
One option might be for the EFSF to buy the bonds of governments directly, however that would mean that Spain would have to request assistance, or a sovereign bailout, something they have steadfastly refused to do so far, and in so doing be subject to that programs bailout terms and conditions.
The restarting of the SMP program on its own is likely to be problematic, given the subordination creditors were on the receiving end of in the Greek PSI. It would also have to be large enough to give the market pause. Given that there is only ?250bn remaining in the EFSF, and Greece is likely to need another bailout, it would appear that Mr Draghi?s options remain limited.
Another LTRO has also been mooted, but as we have already seen, this only served to reinforce the negative feedback loop between banks and sovereigns.
You get the sense that the ECB is striving to buy time until September in the hope that the German constitutional court will sign off the ESM and EU leaders are able to access this mechanism.
The ECB President may well come to regret the boldness of the tone of his remarks last week, however he has been shown to be a shrewd operator so far in his tenure at the helm of the ECB, so he could well spring a surprise.
The main event is likely to be this afternoon?s press conference but either way, the hall is rented, the orchestra engaged, it?s now time to see if Signor Draghi can dance.
Spain is also looking to sell, 2014, 2016 and 2022 bonds prior to today?s meeting highlighting the urgency of possible action later today, with its borrowing costs still high.
Just before the ECB decision we have the latest Bank of England decision, however no change is expected here, given that the Bank has only just started on a fresh slug of stimulus, as well as its funding for lending scheme.
Yesterday?s drop to 45.4 in UK manufacturing PMI was a disappointment, but it was for this very reason that the Bank restarted the program in July. Today?s July?s construction PMI is expected to be similarly disappointing, coming in at 48.7, though it is expected to improve slightly from June?s 48.2.
EURUSD ? the euro once again pushed above 1.2300 yesterday but was unable to hang onto the gains and ultimately failed to test trend line resistance at 1.2360 from the May highs at 1.3285, and the 55 day MA at 1.2440.
We need to see a break below support around the 1.2220/30 area, to retarget the 1.2150 area.
We continue to remain mindful of last week?s bullish weekly candle as well as the support at the 200 month MA at 1.2060, the July lows, which means the risk of a short squeeze towards 1.2600 remains.
GBPUSD ? yesterday?s break below 1.5620 retargets the trend line support at 1.5450 from the 1.5270 lows and this needs to hold to prevent a move back to 1.5270.
The region between 1.5740/80 with the 200 day MA and the June and July highs is also important resistance in order to prevent a break towards 1.5910. Only a close below 1.5240 signals a risk of a return to the July 2010 lows at 1.4950.
EURGBP ? yesterday?s break above the 0.7880 resistance cleared out a few stops before moving back down again. This failure to gain a foothold keeps the downside bias intact.
While below the 0.7880 level the risk remains for further losses. Below 0.7755 targets the October 2008 lows at 0.7695, a break of which could well see a test of the 2008 lows at 0.7390. Only a sustained break above resistance at 0.7880 suggests further gains towards the 55 day MA and the 0.8000 level.
USDJPY ? the US dollar continues to find support below the 78.00 level, with cloud support at 77.30 and the May lows at 77.60 remaining a key level. As long as this holds the downside, the risk of a rebound remains quite high.
A move above the 79.30 level brings the 80.00 level back into play and then by definition the main resistance at the top of the weekly cloud at 80.45.
Equity market calls
FTSE100 is expected to open 12 points higher at 5,725
DAX is expected to open 21 points higher at 6,775
CAC40 is expected to open 12 points higher at 3,335
FTSEMib is expected to open 20 points higher at 13,949