Draghi stimulus disappoints as markets primed for Dec US rate rise

Friday, December 04, 2015

Investors were left somewhat underwhelmed by Mario Draghi’s reaffirmed commitment to extend monetary easing until March 2017 “or beyond” with no clearer sign of this than yesterday’s sharp recovery in the euro. Market participants were expecting more from the ECB and while the central bank promised to extend its €60bn a month asset purchase programme for another six months after the initial end date of September 2016, investors were hoping for additional stimulus. The 10 basis point cut to the deposit facility rate also failed to impress market participants and euro bears were caught off guard as the single currency rallied over 3% immediately after the release, its biggest one day rally in six years, trading as high as 1.0981 against the dollar as traders hurriedly covered short positions.

While the ECB failed to offer as much support as investors were expecting, the decision to hold monthly bond purchases unchanged could be as a strategic move, saving further stimulus for a rainy day. The region is facing significant headwinds from low inflation and central bankers would be wise to hold back some ammo for their arsenal in case eurozone growth slips further. One thing's for sure though, communication between the ECB and the market could have been better given the sharp rally in the euro and the heavy selling seen across eurozone equity markets yesterday.

Janet Yellen continues to prime markets for December interest rate rise as comments during yesterday’s Joint Economic Committee hearing. Key highlights were robust household spending growth and auto sales while a substantial decrease in debt throughout the year put the US economy in a strong position to support an interest rate rise for the first time since 2006.

The Fed held off from raising rates in September citing exogenous macro shocks, namely the Chinese stock market sell-off and falling crude prices, policymakers believe the domestic economy is stable enough to handle a rates rise and data released throughout the week offers further support to this view. As always, market participants scrutinised every word from the Fed chair and with the US economy “doing well” a rates rise this month is “a live option”. The dollar index traded back above 98.300 early on this morning after a heavy sell-off yesterday which was largely driven by the kneejerk rally in the euro.

EUR shoots higher immediately after ECB decision

EUR Curncy Euro Spot 5 Days 15 2015 12 04 07 49 48

Dollar feels the pang as it falls sharply against a basket of major currencies

DXY Curncy DOLLAR INDEX SPOT 2015 12 04 08 19 52

Events for today

0910

EZ

Nov

Markit Eurozone Retail PMI

1330

US

Nov

Change in Nonfarm Payrolls

1330

US

Nov

Unemployment Rate

1330

US

Nov

Trade Balance

Topics: US Fed, ECB, EUR, DXY
More from: Kash Kamal