Indefinite QE by the ECB – DAX30 CFD bulls take on momentum

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  • 17.09.2019
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Economic Events September 16 – 20 2019

Source: Economic Events Calendar September 16 – 20, 2019 – Admiral Markets’ Forex Calendar

DAX30 CFD

In our last weekly market outlook, we noted:

[…]and with the hopes of the ECB delivering a massive monetary stimulus package on Thursday (rate cut and relaunch QE e.g.), the downside in the DAX30 CFD seems limited in our opinion.[…]

With that in mind, the fact that the DAX30 CFD saw a stabilisation and deeper push above 12,000 points didn’t come as such a big surprise.

And it seems in our opinion that the ECB opened the door for further gains in the German index with the decision to cut the deposit rate to -0.5% (which is initially negative for European banks in general), but also implementing a 2-tier system for reserve remuneration and even more important re-launch QE at €20bn per month from the November 1, and which will as long as necessary to reinforce the accommodative impact of policy rates.

A solid translation here would be: the ECB just implemented an infinite QE program which will likely drive the DAX30 CFD higher over the mid-term (presupposed we don’t get to see a further trade war escalation after the Fed did not deliver a rate cut which satisfies US president Trump or sth. else triggering a risk-off mode in global financial markets), activating 12,600/650 points as a first target on the upside.

If a surprising, deeper corrective move is brought on its way, the DAX30 CFD should be solidly supported around 11,800/850 points:

Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD Daily chart (between June 7, 2018, to September 13, 2019). Accessed: September 13, 2019, at 10:00pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the DAX30 CFD increased by 2.65%, in 2015, it increased by 9.56%, in 2016, it increased by 6.87%, in 2017, it increased by 12.51%, in 2018, it fell by 18.26%, meaning that after five years, it was up by 10.5%.

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US dollar

While the USD Index Future saw some elevated volatility initiated by the ECB rate decision and given the fact that the Euro has an overall weight of 58% in the USD Index Future basket, the fundamental outlook for the Greenback didn’t change. This will likely change with the Fed rate decision on Wednesday.

Currently, the Fed Watch Tool shows an expectation of market participants seeing a rate cut by 25 basis points of around 90%.

That said, chances are very high that exactly such a 25 basis point rate cut will be delivered, thus is nearly fully priced in and not cause sharp market swings.

So what’s of higher interest is: what will be delivered in the Fed statement? Will the Fed dot plot suggest FOMC members see further rate cuts in the upcoming 12 – 18 months? Where will the economic projections be, especially with the ongoing tensions in the trade dispute between the US and China?

Any signs of the Fed becoming concerned of the US, but also global economic growth (due to an ongoing trade war between the US and China) and a more dovish stance in her overall rate outlook, should be considered US dollar bearish.

The only thing is: will such a sceptical and dovish outlook by the Fed result in a weaker US dollar after the ECB delivered already a very dovish and thus Euro-bearish stance last Thursday and the BoJ likely to follow on Thursday this week (for further details please check the JPY paragraph below)?

In our opinion, no necessarily. And with that in mind, the USD Index Future could see a stint up to 100.00 points, its highest levels since May 2017.

Still, we remain very cautious in regards to US dollar Long-engagements.

US president Trump is still very aggressive in his recent tweets towards the Fed (“Did he really tweet ‘boneheads’ there? Yes, he did…”) and that said, an outright currency market intervention from the US or at least a statement from the US Secretary of the Treasury Mnuchin, saying that the US no longer has a strong US dollar policy is still on the table in our opinion.

While such a thought stays highly speculative, we think that the higher the US dollar rises in the current market environment, the more likely such a step from US president Trump becomes, provoking a massive US dollar Sell-Off:

Source: Barchart – U.S Dollar Index – Weekly Nearest OHLC Chart (between May 2016 to September 2019). Accessed: 13 September 2019 at 10:00 PM GMT

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Euro

Last week all eyes were on the ECB rate decision. Over the last weeks signs intensified that the ECB would deliver an enormous monetary stimulus package, especially after the remarks from Finnish ECB member Olli Rehn, who said in an interview with the Wallstreet Journal on the 15th of August, that “it is important that we (the ECB) come up with a significant and impactful policy package in September”.

And the ECB delivered. At first glance cutting the deposit rate by 10 basis points (which was widely expected) and re-starting QE at a pace of 20bn € per month seemed below expectations and thus disappointing.

But the ECB delivered more than that: the European Central Bank added QE would run as long as necessary which can be fairly considered uber-dovish.

Surprisingly, the Euro sharply reversed shortly after the ECB decision and stint below 1.1000, closed the week slightly below 1.1100.

The potential main reason can be found in a technical reason: the re-launch of QE didn’t come with the ECB raising the issuer limit rule. That means in the case of Germany for example, that there is headroom to buy a further €30-40bn in German bonds before the 33% limit is reached.

That means, on the other hand, that the now introduced QE programme could run for 10 months before the issuer limit becomes a binding constraint in the case of Germany.

In addition to that, the implementation of a two-tier system for reserve remuneration absorbs Euro liquidity from the FX interbank market, pushing yields higher since a tiered deposit rate suggests that policy rates have approached the effective lower bound.

That said, the downside of the Euro against the US dollar seems currently limited, another push below 1.1000 in the days to come seems unlikely.

If, in addition to that, US president keeps on attacking the Fed, especially after the upcoming rate decision with not aggressively cutting US rates further, speculations around an outright currency market intervention from the US is in our opinion still an option, leaving further bullish momentum in EUR/USD up to 1.1300 in the days to come on the table:

Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between July 16, 2018, to September 13, 2019). Accessed: September 13, 2019, at 10:00pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the EUR/USD fell by 11.9%, in 2015, it fell by 10.2%, in 2016, it fell by 3.2%, in 2017, it increased by 13.92%, 2018, it fell by 4.4%, meaning that after five years, it was down by 16.5%.

JPY

In the days to come, eyes of USD/JPY traders will not only be on the Fed rate decision, but also on the BoJ rate decision from Wednesday to Thursday.

In regards to the Fed, the Fed Watch Tool shows an expectation of market participants expecting a rate cut by 25 basis points of around 90%, what means on the other hand that the main focus of market participants will be more on the question: what will be delivered in the Fed statement?

Will the Fed dot plot suggest FOMC members see further rate cuts in the upcoming 12 – 18 months? Where will the economic projections be, especially with the ongoing tensions in the trade dispute between the US and China?

Any signs of the Fed becoming concerned of the US, but also global economic growth (due to an ongoing trade war between the US and China) and a more dovish stance in her overall rate outlook, could trigger USD/JPY weakness.

But this week, also the BoJ will be of higher interest: one of the main drivers for the USD/JPY to gain further momentum after recapturing 106.80/107.00 was not only the (at least felt) de-escalation of the US-Chinese trade dispute.

In addition to that, rumours made rounds over the last week that the BoJ could consider cutting rates into deeper negative territory. Such a step is among the key options of the BoJ, although the central bank may need to accompany that with measures to mitigate the pain any such move could inflict on financial institutions.

That said, if such a step is not brought up in any way, JPY could regain the recent losses, also result in a drop in the USD/JPY down to and back below 107.00.

Below 108.50/109.00 we consider the picture on a daily time-frame to be bearish with a drop below 105.80 triggering a wave of further selling and quickly activate the region around 105.00 again:

Source: Admiral Markets MT5 with MT5-SE Add-on USD/CAD Daily chart (between June 7, 2018, to September 13, 2019). Accessed: September 13, 2019, at 10:00pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of USD/JPY increased by 13.7%, in 2015, it increased by 0.5%, in 2016, it fell by 2.8%, in 2017, it fell by 3.6%, in 2018, it fell by 2.7%, meaning that after five years, it was up by 4.1%.

Gold

In the days to come, all eyes will be on the Fed Rate decision on Wednesday. Currently, the Fed Watch Tool shows an expectation of market participants expecting a rate cut by 25 basis points of around 90%.

That said, chances are very high that exactly such a 25 basis point rate cut will be delivered and thus is nearly fully priced in by yield sensitive markets like Gold.

So what’s of higher interest is: what will be delivered in the Fed statement? Will the Fed dot plot suggest FOMC members see further rate cuts in the upcoming 12 – 18 months? Where will the economic projections be, especially with the ongoing tensions in the trade dispute between the US and China?

Any signs of the Fed becoming concerned of the US, but also global economic growth (due to an ongoing trade war between the US and China) and a more dovish stance in her overall rate outlook, can be considered Gold bullish.

And even if we dropped below 1,500 USD over the last week of trading, we not only saw a significant pullback into the end of the week, but also consider the yellow metal bullish above 1,380 USD with a potential mid-term long trigger around 1,440/450 USD and with an overall potential target around 1,650/700 USD in the weeks to come.

Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between June 15, 2018, to September 13, 2019). Accessed: September 13, 2019, at 10:00pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of Gold fell by 1.7%, in 2015, it fell by 10.4%, in 2016, it increased by 8.1%, in 2017, it increased by 13.1%, in 2018, it fell by 1.6%, meaning that after five years, it was up by 6.4%.

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