ECB cut GDP and inflation forecasts, and note downside risks to send weakness through the EUR, which in turn benefited the likes of USD, CHF and JPY.
Focus today has fallen mainly on the ECB, with president Draghi’s press conference garnering substantial attention given its dovish tone. The ECB kept rates on hold as expected, before Draghi announced the expansion of the parameters of the existing QE programme by stating the issue share limit for asset purchases is to be raised from 25% to 33%. Draghi went on to state that downside risks have emerged, and the ECB may extend QE beyond 2016 if necessary, as well as downgrading forecasts for CPI and GDP in 2015-17. While these comments are dovish, concerns were exacerbated by the fact that projections were made as of the 12th of August, and therefore the ECB were already downbeat even before 'Black Monday', when we saw extreme volatility over growing concerns on China.
As such, FX markets saw sharp weakness go through the EUR to trade around the 1.1100 handle, with the USD bolstered by EUR weakness to finish the European session firmly in the green. Elsewhere, both CHF and JPY saw strength in the wake of the press conference in a safe haven bid, with some investment bank analysts suggesting that further dovish rhetoric could be seen in the coming months and further QE remaining on the table.
In other central bank news today, the Riksbank kept rates on hold, with a minority of the surveyed analysts suggesting there was a chance of a rate cut and as such, at the release of the decision a bout of strength was seen in the SEK.
Finally, commodity currencies have been bid towards the end of the European session, with the likes of AUD, CAD and NZD all benefiting from strength seen in both the energy and metals complexes, with Oct WTI crude futures breaking above the 61.8% retracement of the 31st Aug high to the 2nd September low at USD 46.99.
Looking ahead, tomorrow sees the key risk event of the week in the form of US Nonfarm payrolls, with heavy attention still likely to be paid to the data, despite some suggesting today’s dovish ECB comments make a Fed September rate lift off look less likely. Tomorrow also sees German factory orders and Canadian unemployment, as well as comments from ECB’s Nowotny and Fed’s Lacker and Kocherlakota.