European stocks turned north Thursday after the ECB kept rates unchanged and reported it will end its bond-buying program by the end of this year. The central bank said it will reduce its program in October to 15 billion euros a month. The regulator has also revised lower its economic outlook and now expects the eurozone GDP to rise 2.1% in 2018, down from the previous forecast of 2.4%. Nevertheless, stocks gained momentum as the overall tone by the central bank was rather dovish. As such, Britain’s FTSE 100 adds 0.48 per cent to 7,740, France’s CAC 40 gains 1.09 per cent to 5,512, while German DAX 30 rises by 1.01 per cent to 13,020. US stock index futures add to gains slightly before the opening bell as the European central bank unveiled a strategy of a gradual exit from stimulus.
The ECB said it will likely end its massive QE program in December and left its rates unchanged as expected. The EURUSD has plunged following the decision as, the same as in the case of the USD and the Fed, the verdict was priced in. But Draghi then increased the bearish pressure on the single currency as the central bank governor highlighted the increasing uncertainty from risks and said that the soft patches will continue in some countries in Q2. The pessimistic assessment of the euro zone economy prospects has disappointed the euro bulls and the EURUSD pair plunged below the 1.17 figure from mid-May highs around 1.1850 reached earlier in the day. The key bearish takeaway here is the fact that the key interest rates will remain at their present levels at least through the summer of 2019. The dovish interest rate outlook has prompted a massive sell-off in the EURUSD which will likely remain under pressure until the dust settles at least.
GBPUSD dropped aggressively as well on the back of dollar rebound following the dovish ECB statement and strong US retail sales numbers which posted the biggest gain in six months. Core sales increased 0.5% in May after an upwardly revised 0.6% increase in April. GBPUSD has dipped below the 1.34 and is getting closer to the 1.33 level against the backdrop of a widespread greenback rebound. In addition to yesterday’s FOMC hawkish rhetoric, today’s numbers open the way for further rise in the dollar amid further signs of economic strength. From the technical point of view, the pair needs to keep above the 1.33 support as a break below will open the way to the intermediate support at 1.3270. The initial upside target now comes at 1.3360 where the 20-DMA lies.
Brent crude struggles for direction following yesterday’s local rebound. The key OPEC+ exporters continue to signal that the increase in output is coming. Considering the barrel has been trading at relatively high levels, this scenario hasn’t been fully priced in yet. So there is a risk of a deeper correction ahead of the summit next week. The question is how much barrels will return to the market as a result of the group’s decision. The market reaction and further dynamics will highly depend on the verdict. Brent has been oscillating marginally below the $77 threshold where the 20-DMA lies. The price doesn’t have enough momentum to challenge this level and stage a more pronounced recovery and may proceed with consolidation for some time before the potential wave of profit taking.
Gold spiked higher on the back of widespread dollar weakness after the FOMC meeting on Wednesday. The price has accelerated the ascent following the ECB decision as the central said its bond-buying program will likely end in December. The metal gained a decent support from the regulators’ signals and jumped to mid-May highs above $1,309 during the European trading. At this stage, all the bearish factors for gold are largely priced in already, so we may soon call a bottom. From the technical point of view, there are signs of a better outlook either. However, strong US retail sales data prompted a spike in the USD, and spot gold had to retreat from highs to the $1,304 area. The price needs to regain the $1,310 area in order to get back above the intermediate resistance at $1,312. There is a risk of further profit taking after the recent spike as the precious metal remains within a bearish trend for now.
Nathan Lambert, Head of Global FX Analytical Department