ECB Preview: What To Expect From Christine Lagarde

Okay, very good morning to you from myself and Christine. We look forward to dealing with you later on this afternoon. Myself, we're going to be covering the whole event live by the Ampfire Trading YouTube channel, so all you need to do is subscribe, hit the bell icon, and you'll get a notification as soon as we go live. And then we're going to be monitoring for the full release. So 12:45 for the statement from Lagarde and then followed by the press conference as well. So going to focus on that really for the morning briefing. We'll go into it in a lot more detail before we do the live event. But as you can see here, a relatively pensive looking ECB president, and she has a bit of a tricky job to manage given some market expectations around some sensitive wording, particularly about the management of the currency at the moment. Which we'll, we'll discuss in more detail. But yeah, we'll go into that shortly. The first things first though, let's just jump over and have a look at where we closed on Wall Street last night. And obviously quite a decent bounce just given the progressive size of what we'd had of 3 days of cumulative selling, really North American-led from last Thursday and their return from holiday on Tuesday. So a bit of a bounce that we're seeing yesterday Some of the mega-cap tech names which had been beaten down just recovered somewhat, around 4% gains for the likes of Microsoft, Apple, and Amazon. Also, we had that news as well from the FT sources talking about AstraZeneca may resume trials as soon as next week, and that was one of the things that caused that initial low price that we had in the overnight session about, uh, 24-odd hours ago or so. So having a look where we are at the moment on the charts Equity index futures continue to remain fairly buoyant for the time being, both in the NASDAQ and the S&P. Both have seen a respective strong bounce yesterday off their 50 DMA. Let me just move my, my camera so we can look at that in a bit more detail. The S&P one probably much more clean in respect to right on that level and where we've moved back up to at the moment, which is having recaptured the 3,400 mark means that we're right back up there, back settling around the previous all-time high in February prior to the, the epidemic and pandemic status of COVID-19. And the actual low then on the 50 DMA and the bounce from yesterday does coincide roughly as well around that initial gap down that we saw between the 21st and the 24th of February. And if you remember, that was when we had the first emergence of coronavirus outside of mainland China, and that was when it was spreading to northern Italy. I think it was Iran and South Korea at the time. So quite a significant technical level for the turn in prices. A lot of people talking then this morning and kind of, I guess, curve fitting a little bit of the narrative around the fact that, you know, a healthy correction, part of the necessary process for those still of a supportive nature of what Fed policy and fiscal stimulus will provide to markets going forward. And yeah, I think that for the time being, I think we found a bit of a low. I'd be surprised if we punch back down through those previous— not last night, previous night's— Astra lows. I don't think we will do today. So perhaps then the selling for the meantime is over. Uh, but elsewhere, attention obviously turns to the ECB. Uh, you can see in the both the major currency pairs in the top left, EURUSD and Cable, both have held on to the pop yesterday, which was largely inspired by some source comments related to the ECB and what we might hear today with some of the latest forecasts, which really bumped the euro higher. And so de facto then, the, the DXY weakened and, and Cable also took a bit of a lift at the same time in sympathy with that move. Elsewhere, gold, T-notes, very quiet, and oil has found a bit of a recovery from the low that was seen just above the $36 handle from yesterday, and we're trading back at $38.15, just short of the highs that were seen yesterday afternoon just as UK were going home. So around 30 cents shy of that, $38.45 on the upside to keep an eye on. All right, well, let's get straight into the ECB and see what we're talking about. One of the main things here is the euro-dollar exchange rate. And obviously this has been a real bone of contention given how quickly— you can see here, if we go back only really a couple of weeks, uh, just 2 or 3 months, we were trading all the way down. And if it goes back to the beginning of the year, we were trading around 107 type levels. And obviously we've picked up as the ECB have over-delivered with their, with their stimulus. And that's come in kind with national governments in Europe topped up by the European-wide Coordinated Recovery Fund. And that, in the context of the weakening dollar on the continuation of Fed easing and various different policy tools, has resulted in this EURUSD with technical breaks, of course, of key levels help accelerated the appreciation of the single market currency. And that has caused some complications then about the strength of that and how it could impede the economic recovery in the eurozone, given the heavy weighting towards being somewhat export-dependent as a marketplace. And so obviously in the last week or two, we've had a number of ECB speakers come out. They've tried to kind of control and talk that down. None other than the chief economist, Philip Lane, talking about his concern for the rate. And that was when really we peaked at around 1.20, 1.20 and a half if you were looking at euro futures. And the market backed all the way down to around 1.17 and a half as a low since that point until yesterday's Sors comments came out. Now the FT has been reporting this morning that for the first time in 2 years, the ECB is expected to include a reference to the exchange rate in its introductory statement. The introductory statement is the part that comes Remember, it's a two-part event. The statement at 12:45, um, is going to publish the results of its monetary policy meeting then with that statement. Although it's likely to be a very bland reference to the euro, remember the nuanced kind of nature of central bank forward guidance or communication. You know, one word out of place could cause quite a dramatic reaction. So obviously, instead of being definitive, they do fairly quite the opposite. But just the fact that it's being mentioned could be enough then to pay heed to the fact that, yes indeed, on an official line, the ECB are watching the euro. They are, they are somewhat concerned about it. And therefore, the wording and what specific wording is going to use will be heavily scrutinized today and could be one of the most market-moving features of the event that's coming. The other things that the market is looking for is So any updates or intonation towards their, their pandemic emergency purchase program, or otherwise known as the PEP? We know that they're expected to keep that at a kind of an envelope or a ceiling amount of €1.35 trillion. However, expectations according to a Bloomberg survey last week were that expectations for an increase of this by around €350 billion will come in the future, probably by year end, which will include then an extension as well of the entire program through to the end of 2021 rather than the summer of next year. Um, the other thing then to look out for is their forecasts. As per similar to the Fed, every calendar quarter alternating, we get ECB or Eurosystem staff projections, and economists see the ECB leaving most of its June projections unchanged. And this was some of the information that moved the market yesterday. Some policymakers have been, or become, more confident in their forecast for the region's economic recovery, according to people familiar with the matter. The latest projections for output and inflation will show only slight changes to the June outlook, with GDP for this year set to be revised up according to that report last year. And again, just going back to refresh your memory here with the euro move that we had yesterday, This was that move when the, when the information came out. Now, a couple of rules or things to be aware of for anyone new to, to markets or indeed tracking this kind of information. ECB sources, or as they refer to in this case from Bloomberg, people familiar with the debate. This is the ECB. So the way it kind of works is a source isn't like a rumor. A rumor is quite simply what it says. It's just hearsay. A source is very different. A source is a qualified contact within the central bank. Now, the central bank uses this as a set procedure outside of kind of normal fixed protocol. And what I mean by that is instead of using set speeches which definitively then put out official commentary from the bank, what they sometimes do— and remember, most central banks adopt a kind of blackout period, particularly the Fed That doesn't detract then from the point that the ECB are fully mindful of market positioning, and market positioning is always really key as to ascertain how a product like the euro might react upon when something is said. As we've seen with the euro currency, the euro has come off quite sharply since the ECB have been kind of talking it down. And so what one of the major risks I think of this meeting was going to be is that the ECB generally toe the line and don't really say too much. But those wanting a more dovish delivery would have been disappointed, and therefore you could have seen quite an aggressive hawkish reaction, a bid way more aggressive than what we saw yesterday. So for me, I think that— and as we normally see with source comments from these major financial news agencies, they come very close to the actual event, and it's an a backdoor way of the ECB managing market expectations. So it's almost heightened my expectations that today we're going to see a fairly uncommitted, you know, no extension of PEPP, no more greater detail on that, a very bland approach to talking about the euro. And something which perhaps without the source comment yesterday would have caused the euro to aggressively appreciate but now we've already factored a lot of that in. If you think about it, they've kind of preempted and managed the situation accordingly a little bit better. So even if we were to see any marginal upside on a less than dovish delivery, then we won't see such volatility that perhaps then the ECB might have envisaged. So in their sense, it's a way of getting ahead of it and trying to not spook the markets. It's very common these types of source comments to come out. And remember, they don't come out a week before, days before, they always come out a day before. Uh, the same thing can happen in reverse. If in a central bank meeting there was ever something that was really shocking and a big surprise for markets, and you see a really big day of market movement, not uncommon to see source comments come out the day after as they try to recalibrate kind of market thinking in order to bring them back on point to the kind of guidance on the messaging that they had intended. So this is quite common practice, but I think yesterday was very telling in my mind, going off historical kind of precedence. A few other things here to be aware of. Lagarde is likely to be asked about the Federal Reserve's new framework, this average inflation targeting, or AIT. This comes, of course, as the ECB is in the process of overhauling its own strategy for the first time since 2003. Remember, Lagarde came in, she made a bit of a splash. She was kind of like, right, these guys have been here for a long time, I'm going to do a whole review because the world has changed and we— and it's time that we, we started to shake things up a little bit. Now the point being here is, are we going to hear anything definitive like the ECB are going to copy, uh, average inflation targeting? Particularly because the fact that inflation, in a similar fashion to why the US were doing this in the first place, because inflation has been under target nearly forever, the ECB's fairly similar in terms of their track record of managing HICP. So you're not going to get anything soon. The, the point being is that the timelines are way different from the US. For the ECB's overhaul of its strategy, they're not expecting results to be due until the middle of 2021. So will she be questioned on it? Yes. Will she give any definitive answer? No. So I don't really see that as too much of an issue in terms of a catalyst to create market movement. Today because it's just too early. Another thing here I just wanted to show, this was a— just going to jump over to here. This is a fantastic crib sheet. I'm going to recirculate it again to all of our traders, but you can also find it on my Twitter handle. I've pinned it to the top this morning so you can access it nice and easy. But, you know, monetary policy events can be very complicated You know, there's a lot of, a lot of nuance, as I said, to the language that gets used. There's a lot of policy tools now in play more than ever given the pandemic response. But this crib sheet does a really great job of just breaking it up into 4 definable different scenarios, that being no ECB panic, i.e., no urgency or panic expressed by the ECB, which suggests that the bar for further policy easing is high, and this may trigger a modest hawkish market reaction. Being situation 1, a dovish tilt. The ECB signals that more will be done later this year, sees downside risk to near-term outlook. Situation number 3, surprise stimulus. ECB frontloads the PEP expansion. And then the kitchen sink is the fourth scenario. The ECB wastes no time as it throws the kitchen sink and tries to boost inflation expectations and restore confidence post-pandemic economic recovery. So this would be you know, an immediate increase of the PEP. Remember the Bloomberg consensus. The easiest way to think about this is one of the main headlines will be what are the actual wording, that introductory statement that she says about the, the euro. That will be key, number one. Number two, what do they say about the PEP? Do they just say that actually, um, nothing at all, or do they say in a scaling fashion, the more higher up we go, the more dovish the reaction would be, weaker euro, probably accelerate DAX stocks in Europe would be they're going to signal the pep by the end of the year. I think that might be more in line with expectations. If they go with €300 billion and they just deliver now, I would say that's earlier than market expectations, albeit a lower nominal value than perhaps people are expecting. So you might get initial quite dovish reaction. And then if they just go €500 bazooka, and it's not uncommon for the ECB to go bazooka territory, and by bazooka I'm talking about just firing the biggest weapon possible possible because Draghi had a real reputation for this. But if they increase the PEP by €500 billion and extend it out to December 2021, the timeline's as expected, but the value is €150 billion above what market consensus is, and it's way earlier in terms of its adoption. So that is going to be quite tricky in terms of the euro and how to interpret that. I was talking with this to a couple of the guys yesterday, and the problem for that is, is that if they— if you look at the euro's reaction and, and stocks' reaction to every of the last 3 ECB meetings we've had. And you can see this in the right-hand corner here. The last 3 ECB meetings have seen a hawkish reaction with a stronger euro and lower European stocks following the event. Now, this in my mind is one of the main things that why we had the comment yesterday from the sources because the ECB are trying to manage that. Because I think overall, as I said, I don't think they're going to announce the PEPP extension as much as now. I think they might give a hint towards it coming, um, later on in terms of this year. I don't think that will come as too much of a surprise. They might make a comment, but it's not going to be, just given all the comments we had from an ECB member on the euro currency, that shocking on that front. And then the, the, the forecasts, if they get upgraded in terms of this year in growth and the rest remains static. Well, we already heard that yesterday. So all in all, they've tried their best to try to manage it, and that's why I think that will be the outcome, uh, because of here, uh, as we said the last few meetings, remember when the ECB doubled down and doubled basically the, the PEPP program, so became more accommodative in their, their monetary policy stance In theory, in theory, that should weaken your currency. However, it did the opposite because in the context of a pandemic situation like we are in now, actually people have perceived more accommodative monetary policy, more expansive easing if you like, in whatever shape and form it takes as a net positive then for assuring a faster, cleaner, quicker economic recovery in the eurozone. And so it's, it's counterintuitive to its normal move. So looking at the euro today, if they did throw 500 billion immediately at the PEP, then it's hard to say. Then originally you would think theoretically that should weaken the euro considerably. However, if we go off previous meetings and what we've had when we've seen this type of activity from a policy perspective, euro and the DAX has actually rallied because it's all about then the economic recovery rather than it is about such a clear representation of a normal policy reaction in that sense. So the euro is a little bit messy in that regard because it's hard to say whether it would— have we moved on back to more traditional times now? Because obviously in the depths of a pandemic it's different, people are panicking, what they want is assurance. Now the markets are relatively calm comparative to March. I'm not so sure that the, the reaction is so binary like that. And so if you look at the DAX though, for example, for example, the German stock market, well then if you think about it, if they really do 300 or they do 500, if they deliver more pep, that's going to be bullish. Um, so I think that that's just much more binary in that sense. So perhaps that might be a way to look at it, not just thinking about the actual event but thinking about what product is actually going to see the most meaningful and clean opportunity to potentially trade. And one final point is, um, EURUSD— you can see this here in the top left— EURUSD overnight vols for the SEP ECB meeting at the highest since March ECB meetings. Implied breakevens point to a ±0.57% move, suggesting some modest expectations for ECB jawboning, uh, that could spur a notable move in the single currency during the meeting. But as I said, I'd say a little bit of that has been taken, taken off the table given the source comments from yesterday. But all in all, today should be a pretty interesting meeting, and there is potential, of course, for sizable reaction given what Lagarde needs to manage today on, on multiple fronts, which is a market which is anticipating more stimulus. So how does she guide that and towards timing? And then more importantly, what type of wording, given market sensitivity over this management of the euro at these fairly elevated levels in context of recent price movement. So yeah, moving on though, let's have a look at a few other things. This was one of the other big headlines from yesterday in terms of not so much— I mean, it has been an added weight to add on the pound, but as I say, cable's found a bit of a footing just given some of the, the euro appreciation from yesterday, which, which pushed the dollar index lower to the benefit of cable. But let me just give you a quick summary. I've made a couple notes here because I have had a couple of questions from people about what is going on with this Brexit stuff. You know, what is this internal market bill and how do you interpret it? So let me run you through a few things. So the European Union, as per these headlines here, is studying the possibility of legal action against the UK over Boris Johnson's plans to breach the agreement governing Britain's withdrawal from the bloc, according to a document seen by Bloomberg. Now, this all comes after the UK yesterday unveiled its bill on internal markets. Now, what, what's the deal here? So let me explain. Um, it's seeking, uh, this, this, this bill is seeking power to undo sections of the Northern Ireland Protocol. And that part, that's part of the legally binding withdrawal agreement, uh, it signed with the EU in January. Remember, this is one of those big things that was a big contentious area at the end of last year. The protocol, um, the one that's in place at the moment, is designed to prevent a hard border on the island of Ireland at the cost of creating a customs border in the Irish Sea. The EU is concerned that goods can enter its single market unchecked, and it's also worried that UK subsidies will put EU firms at competitive disadvantage if there's any changes to this withdrawal agreement that was previously agreed back in the beginning of the year. The two sides, of course, are going to meet for an emergency meeting later today. Today was actually the tabled anyway final day of UK and European negotiations for the 8th round of discussions. And obviously we still remain gridlocked on the issues of state aid and UK fishing waters. And now we've got this latest, um, episode from what the government has done with this internal market bill and talk about ripping up then the breaking of international laws. Downing Street is concerned that Northern Ireland Protocol— now what's their thinking? So Downing Street's concerned that Northern Ireland Protocol could threaten its plans to provide state aid to British businesses. Potentially, the EU could block a subsidy to a company in England, Wales, or Scotland on the grounds that it might help or hurt a business in Northern Ireland, which will still have to follow the bloc's state aid rules after December 31st. So remember, Northern Ireland, as part of the agreement, is going to have to continue to adhere to some of the European terms. And so you cannot give them, the UK, certain aid a state basis to Northern Ireland because of the fact that then it's going to be, um, not treated fairly then in a competitive sense for other European nations. So it can't act in one and then have rules in another, so to speak. Separately, um, House Speaker Nancy Pelosi in the US has said that there is absolutely no chance of a UK-US trade agreement if Johnson's actions threaten peace in Northern Ireland. A number of conservative lawmakers and grandees have also weighed in with their concerns as well. So, you know, Johnson's come under a lot of pressure both internally in the party, against Europe, and now some of the noises in the US. You might think, well, what's Nancy Pelosi got to do with this? But you've got to remember, in American politics there is a, you know, historical strong influence of of Irish ties. Richard Neal— that name you probably wouldn't have heard of— but Richard Neal is an Irish-American member of the House of Representatives, is the Democratic chairman of both the Congressional Friends of Ireland and the House Ways and Means Committee, which does hold the power to approve or block any US-UK trade deal. And so he's in a substantial position of influence when it comes to them potentially, the US, the UK, brokering a deal with the US. So, you know, Nancy Pelosi saying what she's saying, she does have some clout in that respect through his backing, uh, in that regard. So there's a lot of risk on the table from doing this. And reading between the lines, you know, is this just a strong-handed move, um, from Boris to try and just force the hand of Europe. Perhaps it is, but obviously this game of brinksmanship, as much as it might be, that does need to be factored in as potential downside risk to sterling. So I'd say for the moment a lot of this has now passed as far as market price is concerned. I don't think that this latest piece is necessarily a trigger point to then get short again the pound. I think that opportunity now has passed. That was at the beginning of the week where we've seen quite a decent run lower in sterling. I think now the focus changes now to, to euro-denominated movement, and depending on what happens with the ECB today will dictate largely then the rest of the movement in other G10 currencies. The final thing I wanted to mention was oil prices, and this was out from the FT, um, Overnight, Saudi Arabia to keep pumping despite falling crude prices. Obviously crude has fallen below $40, and that's accentuated a move down to $36, but we have bounced since then to trade around $38 at the moment. But relative to recent week's price action, we're still a little bit lower than where we have been consolidating. All in all, this article is saying that Saudi fears that if it cuts more output to support prices, that other countries will take advantage and produce greater amounts, jeopardizing the unity of the OPEC+ group that, that enacted record supply cuts in April as demand collapsed. So it's just quite interesting here. Obviously, Saudi Arabia often is found picking up the tab for uncompliant nations, typically Iraq, Nigeria, and the like. And so they don't want to fall into that situation once again. But what that means then is, uh, if they're reluctant to cut prices even further, does that give them a little bit further potential supply negative to price if they're not willing to do so? I'd say it's too early to really come to that conclusion, uh, and obviously any forward expectation of the direction of crude needs to be taken in combination with your opinion as much as well on the demand side, which is heavily dependent on the COVID-19 situation, of course. Okay, quick look at the calendar just to wrap things up. Uh, the morning, you can expect things to be particularly quiet. Everyone's going to sit on their hands and wait for what arguably is the main event of this week, which is the ECB. As I said, 12:45 is the first part, and that, that first part will be meaningful if the FT is right in the fact that for the first time in in 2 years we're going to get an explicit reference in the introductory statement to the euro exchange rate. That will be the key point to look out for there. We're going to go live on the YouTube channel again at 12:30 so I can give you a bit of a further briefing ahead of it, and then we'll, we'll cover it live as it happens. Me and the rest of the team will stay on then to cover the 1:30s. At 1:30 we also get the initial jobless claims out of the US. Expecting a similar number to last time, around 800,000 to 900,000, which I don't think would create too much in the way of any type of reaction. And I think more market focus will be on the ECB at that time because Christine Lagarde will kick off her press conference. Press conference normally lasts for about anything from, I'd say, 40 to 50 minutes or so. She'll read the opening statement, we'll get all of the projections as well. and they should go into the Q&A, of which there's a hierarchy of probably the most market-sensitive types of questions from the more senior members of the press pack will come first. So typically then the Q&A is quite front-loaded timings-wise in terms of where there's any potential trade opportunities that might come. The longer it goes on, the less likely it is that she'll say something market-moving. You've then got the oil inventory numbers. Remember, they'll come out afternoon, given the fact there's a Labor Day holiday in the US on Monday, which means that all the data in inventories is bumped along. So don't forget as well, that's at a slightly later time of 4 PM rather than the usual 3:30. Yeah, that's it, that's all I'm going to cover for now. So I look forward to seeing you guys online later for the ECB if you're free. Otherwise, hopefully the preview made sense. And yeah, check out my Twitter for the graphics and things if if you need them to hand. Okay, good luck, and I'll catch you later. Thanks very much.