Market Update – June 6, 2017

Market Update – June 6, 2017

The big week for the Euro has arrived. The European Central Bank’s meeting this coming Thursday is poised to change the language in the Governing Council’s announcement.

 

It should come as no surprise. The recovery seen in the European block is real and spread across different countries. Germany and France, the two pillars of European growth, are not alone anymore. Spain and central-eastern economies surprised with positive data.

 

The only thing that lags is inflation. The problem with it is that the ECB’s mandate is all about inflation. Therefore, while the ECB is expected to shift its bias to a more bullish stance, Draghi will try to downplay the positive news at the press conference only to cover for the lack of inflation.

 

There are plenty of things the ECB can do, but not to raise the rates. Communication is an important tool in any central bank’s arsenal. If used wisely, it can have amazing effects. Just remember the “whatever it takes” speech in London, where Draghi lifted the Euro without actually doing anything.

 

The Non-Farm Payrolls in the United States disappointed last Friday. However, one may argue that in this stage of an economic expansion, it is only normal that the labor market cools a bit. Let’s not forget that the unemployment rate is down to 4.3%. This tells much about the strength of the US labor market and keeps the June rate hike on the table.

 

I personally think that there’s no room for any surprise in next week’s Fed decision. The markets will have their rate hike. The problem is that no one knows how prices will react. The decision was so well-communicated, that, by some standards, it is always priced in at current prices.

 

Funny enough, despite the NFP reaction, the EURUSD failed at 1.13 once again. For more than a week now, the pair struggles between 1.1250 and 1.1300, not being able to clear the stops. My take is that it will, eventually, and I can’t think of a better opportunity than the ECB press conference this week.

 

Look for the ECB to drop some wordings from their statement. Such small changes will give hawks a bone and Draghi will make sure doves will be kept at bay as well. From a technical point of view, a break of the 1.13 level opens the gates for a move above 1.14 and even more. I’m looking with interest at a possible impulsive wave part of a zigzag, with the market being in the a-wave of this zigzag.

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