ECB To Decide on QE Expansion in December

Daily Analysis - 23/10/2015

European Central Bank Left Monetary Policy Unchanged While Opening Door for Further Action


ECB President Mario Draghi signaled the Central Bank was aware of the downside risks during the press conference and that due to lack of inflation and growth in the Eurozone area, the ECB would consider its asset purchase options in greater depth during the December meeting.

Euro Falls on Draghi’s Comments

As widely expected, the European Central Bank left its key lending rates unchanged but followed up with extremely dovish comments during the press conference. President Mario Draghi gave the markets what they were looking for by citing that the ECB could consider expanding on its current quantitative easing program in the December ECB meeting where the staff economic projections are also set to be released. While no specifics were mentioned about extension or expansion of the existing asset purchases, the weak external situation was given as a rationale for caution.  The Euro fell on the comments after staying flat near 1.1300 for most of the session, eventually closing at 1.1100, a well-known level of support. Looking ahead, the Eurozone flash PMI numbers are due out later today, although not much of a reaction is expected.


UK Retail Sales Hit Multi-Month Highs

Retail sales numbers from the UK surprised with strong gains, rising 1.90% in September posting one of the strongest monthly increases since January 2014.  Retail sales numbers received a substantial boost on account of the Rugby World Cup and beer sales during the event. The ONS noted that the strong retail sales numbers would add 0.10% to the economy's gross domestic product figures during the fourth quarter. The British Pound touched a one-month high at 1.5500 before giving back its gains to settle the day at 1.5392. Cable continues to trade sideways albeit posting lower lows. Yesterday’s declines saw the GBPUSD pair post a 5-session low. The weekly charts point to a possible wedge pattern taking shape which could signal an imminent breakout to the upside over the medium-term timeframe.


S&P 500 Rallies

The S&P 500 is currently trading near 2056, posting a 3-week winning streak. Prices are trading just below the main support at the 2060 resistance level, which will be critical for further determining directional momentum. A weekly close above 2060 could confirm the S&P 500 is poised for a retest of previous highs above 2120. With the US earnings season underway, yesterday's earnings releases included McDonalds, Caterpillar, Amazon Inc. amongst others. While earnings are broadly mixed, yesterday’s releases saw share prices of MCD and AMZN rally. However, broadly speaking, revenues growth remains anemic or negative while the bottom line also shrinks.  Following the S&P 500 higher, the Dow Jones Industrial Average gained 1.87% for the session. The major stock benchmarks are likely to trend higher in the coming weeks as speculative bets on Draghi’s stimulus expansion is likely to see further flows into equity markets.


Canadian Inflation

A day after the Bank of Canada left rates unchanged, retail sales for the month of September increased for the fourth straight month, rising 0.50% on the headline alongside upward revised sales to 0.60% during July. The robust increase in retail sales is expected to benefit the upcoming fourth quarter GDP estimate, which currently sits at 2.50% annualized growth. Overall, upbeat retail sales numbers point to Canadian GDP subsequently emerging from a negative GDP reading as investors shift focus from the weakness in the oil patch to other aspects of the economy. Today's main event for the Loonie is the inflation report which is expected to show the Core CPI at 0.30% and headline CPI at -0.10%. The USDCAD currency pair closed at 1.3080 yesterday after briefly testing 12-day highs near 1.3150.


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