Forex Markets Brace for Volatility on ECB Meeting, US Payrolls Data

Talking Points:

• Euro Looks to ECB Rate Decision for Hints on Future Stimulus Expansion
• US Dollar to Rise if Nonfarm Payrolls Tops Forecasts, Boosts Fed Outlook
• Australian Dollar Sharply Lower in Asia on Comments from RBA’s Stevens

A monetary policy announcement from the European Central Bank headlines the calendar in European hours. The introduction of anything new into the policy mix highly unlikely after Mario Draghi and company announced a slew of additional measures to boost lending and fight disinflation at June’s meeting. Officials will likely want to monitor how those are working out before expanding stimulus further.

With that in mind, the spotlight will be on Mr Draghi’s press conference following the policy announcement, with investors combing the President’s rhetoric for clues about where the ECB may go from here. The fate of the ABS purchase program stands out in particular. The ECB pledged to “intensify preparatory work” on the plan and investors will want to see if that means the central bank has already settled on implementing it.

If traders interpret Draghi’s comments to mean the ECB intends to activate the ABS purchase program once it is ready, that would imply an expansion of stimulus is in train. Needless to say, such an outcome is likely to bode ill for the Euro. Alternatively, rhetoric suggesting the ECB is developing the plan as added ammunition for its arsenal and may never actually use it (as has been the case with the OMT program) may offer a bit of a lift to the single currency. Technical positioning hints EURUSD may be topping.

On the US data front, the much-anticipated Nonfarm Payrolls measure is expected to show the economy added 215,000 jobs in June. A print north of expectations is likely to narrow the perceived time gap between the end of QE3 – expected later this year – and the subsequent commencement of interest rate hikes. Such a result is likely to boost the broadly boost the US Dollar against its leading counterparts. Needless to say, a disappointing outcome stands to produce the opposite response.

The Australian Dollar sank in overnight trade, losing as much as 0.7 percent on average against its leading counterparts. The selloff followed a round of strongly-worded comments from RBA Governor Glenn Stevens. The central bank chief said investors are underestimating the chance of Aussie depreciation, arguing that most measurements suggest the currency is overvalued. AUDUSD formed a bearish technical pattern below the 0.95 figure heading into the overnight session.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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