Queasy On Easing, Onto Q2 GDP

The ECB on Thursday demonstrated just how tough it will be for central banks to match the appetite of markets for easing. The euro was the top performer while the New Zealand dollar lagged. The first look at Q2 U.S. GDP is up next. Thursday’s pre-ECB Premium trade in the euro (not EUR/USD or EUR/GBP) is already 90 pips in the green. Ashraf laid out the fundamental and technical rationale for taking the trade before the ECB announcement.

The ECB essentially pre-committed to cutting rates and buying more bonds with the potential for even more in September but that left markets disappointed. The euro touched a two-year low then reversed 85 pips higher on Draghi. He sent mixed messages, saying the outlook is “getting worse and worse” but also that “it’s difficult to be gloomy today.”

Ultimately, it wasn’t the clear dovish message that markets wanted. That sparked fears about more of the same from the FOMC next week, and potentially the BOJ. The broad market theme was worry about less easing and that sent USD/JPY higher, yields higher and stock markets lower.

Economic data contributed to the sentiment as core U.S. durable goods orders rose at the fastest pace since 2017.

Friday features a key input for the Fed with the first estimate of Q2 GDP. The consensus is 1.8% but the market is probably a tad lower after soft trade data Thursday. Still, there’s wide variance in the advance release and the market tends to overreact. That will be especially true so close to the FOMC.

The market is now pricing in just a 17% chance of a 50 bps cut from the Fed, in part because the U.S. and China are talking on trade once again. However the risk is that Powell cuts but then essentially repeats current language and gives himself an option to cut in the future without precommitting or delivering a strong hint. If so, the market reaction will look much like it did Thursday.

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