Daily Commentary | ECB set to stand pat; Draghi likely to repeat previous mantra | 09/03/17

09.03.2017, 10am

Daily Commentary • ECB set to stand pat; Draghi likely to repeat previous mantra Today, the highlight will be the ECB policy decision, followed by a press conference from President Draghi. The forecast is for the Governing Council to take no action. The Bank was surprisingly dovish at the latest meeting, in our view. Although the bloc’s headline inflation rate for December surged to a level last seen in 2013, President Draghi downplayed the importance of that improvement. He pointed out that he sees no convincing upward trend in underlying inflation, and that the latest progress in the headline CPI is mainly due to energy-related effects. He implied that until there is material progress in the core CPI, the Bank is likely to keep its policy stance unchanged. Considering that February’s preliminary CPI data showed more of the same, i.e. a rising headline rate but a flat core rate, we doubt that the Governing Council will shift away from its dovish bias today, despite the headline rate hitting 2%. As such, we think that this meeting may be a repetition of the previous one. Like last time, Draghi may try to downplay the recent progress in forward-looking indicators such as the PMIs, by pointing out once again that underlying inflationary pressures have not begun to pick up yet. We think that such dovish comments could prove negative for the euro, but considering that something like that may already be more or less anticipated by investors, any such reaction may be modest.

• ADP report crushes forecasts, enhances speculation for a strong NFP The US private sector added 298k jobs in February according to the ADP employment report for the month, far more than the anticipated 190k. Coming on top of unusually low initial jobless claims for the month, this remarkable ADP print suggests that the NFP print for February, due out tomorrow, is likely to beat its forecast of 190k as well. The US dollar came under renewed buying interest on the news, as the increased possibility for a strong NFP makes a March rate hike appear almost a done deal. The probability for such action is currently 90% according to the Fed funds futures and a robust employment report tomorrow could push it even higher.

• EUR/USD continued trading lower yesterday, fueled by the strong ADP report. The pair remains within the sideways range between 1.0500 (S1) and 1.0630 (R2) and as such, we still consider the short-term path to be sideways. Nevertheless, a dovish ECB today could push the pair towards 1.0500 (S1), the lower bound of that range, where we expect investors to settle and wait for the US jobs data. A strong report tomorrow could prove the catalyst for a break below that key obstacle, something that could help the bears remain in the driver’s seat heading into next week’s FOMC policy gathering.

• WTI prices collapse on surprisingly large US inventory build WTI prices collapsed yesterday, following a much larger than expected inventory build in US oil supplies. The EIA indicated that inventories rose by 8.2 million barrels last week, far higher than the consensus for roughly 2 million barrels. WTI plunged and broke below the 51.50 (R2) key support (now turned into resistance) to stop near 50.40 (S1) before rebounding somewhat. The 51.50 (R2) zone acted as the lower bound of a sideways range that had been in place since the beginning of December. Therefore, its break opens the door for more downside extensions. We believe that oil prices could remain on the back foot for a while following this sudden shift in market sentiment, especially if subsequent reports continue to show an abundance of supply. It is possible that the bears will take the reins again below the 51.50 (R2) level and drive the battle south for another test near 50.40 (S1). A dip below that support could trigger extensions towards our next hurdle of 49.35 (S2). Another factor that may keep WTI prices under pressure is the fact that US shale producers have begun to return to the market. The Baker Hughes oil rig count has been rising steadily in recent months, and has accelerated following the OPEC consensus in late 2016, suggesting that US supply is likely to remain robust. Although yesterday’s tumble only looks as the beginning of a corrective move in the larger uptrend, all the aforementioned factors make us hesitant to trust WTI’s longer-term path. We believe that the likelihood of that correction leading to a reversal is not something to overlook.

• As for the rest of today’s highlights: During the European day, we have a very light data calendar, with no major indicators due to be released.

• From the US, we get initial jobless claims for the week ended March the 3rd. The forecast is for the figure to have risen after falling to its lowest level since 1973, though that would leave the 4-week moving average more or less unchanged.

• Besides ECB President Draghi, we have one more speaker scheduled for today: UK Brexit Minister David Davis will address the House of Commons. Following the recent amendment to the Brexit bill passed in the House of Lords, which the government vowed to overturn in the House of Commons, his comments are likely to be closely followed.


EUR/USD

• Support: 1.0500 (S1), 1.0450 (S2), 1.0390 (S3)

• Resistance: 1.0570 (R1), 1.0630 (R2), 1.0675 (R3)


WTI

• Support: 50.40 (S1), 49.35 (S2), 48.40 (S3)

• Resistance: 51.10 (R1), 51.50 (R2), 51.85 (R3)




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