ECB EVENT RISK IN A NUTSHELL - Hope everyone is enjoying the new site! So we are into the latter half of the week and there is some major event risk that will need to be digested between now and the Friday close. First up is today's European Central Bank rate decision and Draghi presser. Now I'm not going to break it all down and parse out all of the potential scenarios, which I'm sure you have all read about (ok if not, here is a good overview piece). What I will do is make it very clear that it always has very little to do with what actually happens and so much more to do with what the market has been expecting and more importantly, what the market is pricing in. With that in mind, I think it is pretty clear that since the last ECB decision, the market has been aggressively pricing in a rate cut and dovish outlook, which has already weighed on the Euro a good deal. Now don't get me wrong, I am not saying that you should be buying the Euro today because of this. What I am saying is that you shouldn't be so quick to sell the Euro either at current levels. The market has already sold into today's rate decision, and so now it will come down to just how much more or less dovish the actual decision is relative to what the market expected. Technically, selling the Euro is clearly the favored strategy. At the moment, EUR/USD looks like it is locked in a bearish consolidation ahead of the next drop towards the yearly low around 1.3470. A break and daily close below 1.3585 would confirm this outlook. At the same time, we could still easily see a bounce back towards 1.3700 without compromising the bearish structure and the market could carve a lower top somewhere around the 1.3700 figure before heading lower. So while I retain my bearish bias, I am not a fan of selling the Euro at current levels.
DANGEROUS AND MISLEADING DISTRACTION - But in truth, my focus really isn't on the Euro at the moment, and I am really more interested to see what happens to the broader market in reaction to today's event risk and tomorrow's highly anticipated US employment data. For me, the focus has been less on one specific currency pair and more on the general tone. Specifically, we have seen a move towards the US Dollar in recent weeks, and some renewed downside pressure in the emerging market currencies. So while some market participants may be distracted with the bid tone USD/JPY and US equities and concluding that all is well out there and risk appetite is quite healthy, I believe this would be a faulty path to take and one which couldn't be further from what actually is going on. I would be paying much more attention to the broad US Dollar demand, currency weakness, and continued downside pressure in EUR/CHF. While EUR/CHF hasn't done all that much moving of late, whichever direction this market takes has spoken volumes in my view, and the fact that this rate is still tracking around 1.2200 tells me that risk assets are vulnerable at current levels. I believe the renewed demand for the Buck, downside pressure in risk currencies, and weakness in EUR/CHF all translate into a currency market that is positioning for a Fed policy reversal, and a currency market that understands this anticipated Fed shift will ultimately translate into vulnerability in risk assets. So while USD/JPY may have found some bids, it is likely these bids are less a function of risk on demand and more associated with the broad USD demand. This really leaves US equity markets as the outlier at the moment. But make no mistake. US equities are the critical outlier. Just as all other markets have already begun to respond to the end of the line for current Fed policy, so too will the US equity market. So if you're asking me, I'd say pay less attention to the Euro today and put more focus on the overall price action. This is where things are really interesting.