Buy the (dollar) rumour, sell the fact even if the ECB had not disappointed

Market Analysis – by Junaid Wilson

After a momentous week in the markets all the data has been digested, The US dollar was sharply lower last week as initial strength was abandoned in the wake of the markets swift reaction to the ECB’s further measures announced on Thursday. Losses were stemmed on Friday however as the November NFP came in just above expectations with the unemployment rate remaining at 5%.

The EUR was seen sharply higher in response to the ECB’s apparently disappointing course of action. The ECB cut rates in line with the expected 10bps reduction and although QE was extended (now set to run until at least March 2017) the stimulus program was not increased at this stage. Players who had been heavily short the euro into the event, took profits on positions seeing a large spike in EUR.

The divergence of monetary policy remains very much in place, and we think it is not fully priced in. As such, we wonder if it really can be discounted. We see the price action as an arguably long over-correction to a move that began in mid-October. The extent of market positioning had left it vulnerable to a buy the (dollar) rumour, sell the fact even if the ECB had not disappointed.

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Fed funds future has currently priced in a 74% probability of the fed hiking in December.

Looking ahead to the remainder of the day, there will be little data that could cause volatility. The Eurozone Sentix index of investor sentiment for December and US employment trends and consumer credit are the only data points on the calendar. The pound could see some action as the Bank of England governor will testify before the parliament in Brussels. Regional Fed Governor James Bullard will also speak later during the US session.

The main risk events to watch this week will be:

-Japan GDP –Tuesday

-Euro zone GDP –Tuesday

-UK GDP estimate –Tuesday

-New Zealand monetary policy –Thursday

-Australia unemployment rate –Thursday

-Bank of England monetary policy –Thursday

-US retail sales -Friday

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