European Central Bank Meeting Likely to Generate Intraday Volatility

Fx traders should be prepared for intraday volatility today as several events are likely to impact the global currency markets including US initial jobless claims, UK PMI for construction and a European Central Bank press conference.

In the US, investors will keep a close eye on the weekly jobless claims. Today’s release will bring no relevant information for tomorrow’s payrolls release as it doesn’t concern the survey week of the payrolls. In addition, there might be some ‘strange effects’ as claims figures cover week of Thanksgiving and Black Friday. Nevertheless, investors will look for confirmation of recent signs of improvement from the US labor market. If confirmed, this should in theory be supportive to the US dollar.

However, one might assume that the focus of markets will continue on the euro side of the story.

The UK PMI of the construction sector will be published today, however the big event to watch will be the ECB meeting and the press conference at 1:30 P.M. GMT. In line with our assessment for EUR/USD, we see the risk for high volatility also in this EUR/GBP cross rate.

If the ECB decision would turn out to be positive for risky assets, we could see some further unwinding of EUR/GBP shorts. However, as indicated in the EUR/USD piece, we reiterated that it won’t be easy for the ECB to meet the high expectations of
markets. In this respect, we stay cautious on euro long positions at this stage.

It is almost impossible that Mr. Trichet’s press conference after today’s ECB meeting won’t bring any market moving news. Will the ECB continue to scale down unconventional measures of liquidity providing or will it backtrack on this process in the wake of recent intra-EMU sovereign crisis?

Yesterday, all kinds of rumors swirled on the ECB preparing a big step to address the crisis in the peripheral European bond markets. To put it simple, investors are/were betting that the ECB will throw the towel and that it will join the Fed and BoE in some kind of quantitative easing (or to put it more correctly ‘credit easing’).

Never say never, especially not in the current highly uncertain environment. Nevertheless, we have the impression that market hopes are very high and that it will be very difficult for the ECB to meet market expectations. In addition, if the ECB would make this quantum leap, one can raise the question whether the euro should profit from it. Such a scenario would support risk-taking, but from a fundamental point of view, it should be considered a LT negative for the euro.

Putting this altogether, we stay cautious on the euro. The balance of risks for the single currency remains to the downside. Whatever the outcome of the ECB meeting/press conference, one should prepare for extreme intraday volatility today.

Content provided by: KBC Bank