26-OCT-2018, FRIDAY

1) ECB Makes No Changes to Policy, Euro Lower after Draghi Press Conference
2) Gold Prices Struggle to Capitalize on Market Meltdown
3) AUD/USD Rate Holds Narrow Range Ahead of U.S. GDP, Australia CPI

1) ECB Makes No Changes to Policy, Euro Lower after Draghi Press Conference

As was widely anticipated, the ECB’s Governing Council kept its main rates on hold and signaled its continued intention to end its QE program in December 2018. The Euro took a dive during ECB President Draghi’s press conference this morning, and ahead of the US session close, no recovery has been staged thus far. While it was confirmed that the ECB will end its QE program in December 2018, it was also revealed that the ECB could consider other tools as it has in the past (i.e. TLTROs) if it were required to support a member country, namely, Italy. The dovish tilt gave traders fresh reason to sell the Euro over the course of Thursday.

The Euro is holding its ground this morning following the release of the European Central Bank’s October policy statement and rate decision. As was widely expected, the ECB’s Governing Council kept the main rates on hold; overnight index swaps were pricing in a 0% chance of a rate hike. Similarly, it was indicated that the QE program will run its course until December 2018 as intended, as which point the ECB will keep rates on hold for “as long as needed,” a timeframe that ECB President Mario Draghi has indicated to mean sometime around “summer 2019.”

Since the June 2018 meeting, the Governing Council effectively has policy on a preset course, and without a new set of Staff Economic Projections, expectations for any change in policy were correctly extremely low Like the Federal Reserve (with its Summary of Economic Projections) or the Bank of England (with its Quarterly Inflation Report), the ECB has a multi-year track record of only making significant policy shifts at meetings when it has new economic forecasts in hand.

If there’s one item of interest to monitor during ECB President Draghi’s press conference, it’s neither the timing of ending QE nor when the first rate rise will occur, but rather how the ECB views the situation unfolding in Italy. European bond markets have been hurting recently, with contagion spreading from Italy to Spain in recent days; both countries’ sovereign bond yields are at multi-year highs, and their spreads versus Germany are widening out at a quick pace. Such an environment – one marked by continued tensions between Rome and Brussels over the Italian budget, as well as lingering concerns about the Turkish Lira’s depreciation impact on European banks – leaves open the possibility that, if ECB President Draghi is to change tact at all, the shift would be in a more dovish direction.

2) Gold Prices Struggle to Capitalize on Market Meltdown

Gold prices tiptoed lower while crude oil prices rose tepidly with stocks amid a brief interlude in the broad-based risk appetite collapse defining financial markets this week (as expected). These moves’ corrective character was made plain soon enough however as sentiment soured anew in Asia Pacific trade. Third-quarter US GDP data may amplify the risk-off push. Growth is seen slowing to an annualized rate of 3.3 percent, down from the four-year high of 4.2 percent previously. That is both a large-enough comedown to rattle already jittery investors and a strong-enough print to keep Fed rate hikes on track.

Gold prices failed to make good on yet another attempt to breach resistance in the 1235.24-41.64 area. Reversing lower from here sees support in the 1211.05-14.30 zone, with a break below that targeting the September 28 low at 1180.86. Alternatively, a rally beyond resistance exposes the 1260.80-66.44 region.

3) AUD/USD Rate Holds Narrow Range Ahead of U.S. GDP, Australia CPI

AUD/USD clings to the monthly range ahead of key data prints coming out of the U.S. and Australia, but the diverging paths for monetary policy continues to cast a long-term bearish outlook for the exchange rate as both price and the Relative Strength Index (RSI) preserve the bearish trends from earlier this year. The recent weakness in AUD/USD appears to have fizzled ahead of the monthly-low (0.7041) as the exchange rate holds a narrow range, and the updates to the U.S. Gross Domestic Product (GDP) report may keep aussie-dollar afloat as the growth rate is projected to increase 3.3% after expand 4.2% per annum in the second-quarter of 2018. A lackluster development may rattle the U.S. dollar as it dampens the outlook for growth and inflation, but the data print may do little to derail the Federal Open Market Committee (FOMC) from its hiking-cycle as the central bank large achieves its dual mandate for monetary policy.

In turn, the U.S. GDP print may spark a limited reaction, and market participants may end up paying increased attention to Australia’s Consumer Price Index (CPI) as the headline reading is expected to narrow to 2.0% from 2.1% in the second-quarter. Signs of subdued price growth is likely to keep the Reserve Bank of Australia (RBA) on the sidelines, and it seems as though Governor Philip Lowe & Co. will carry the record-low cash rate into 2019 as ‘there was no strong case for a near-term adjustment in monetary policy.’

With that said, the RBA may continue to tame bets for higher borrowing-costs at its next meeting on November 6, and the diverging paths for monetary policy may generate increased volatility in the exchange rate along with a further shift in retail sentiment.