DailyFX

Euro and EZ Capital Market Investors Watch Important ECB Court Ruling

John Kicklighter

DailyFX.com -

Talking Points:

  • Dollar Weighs Growth Forecast Upgrade, FOMC Fodder and Active Counterparts

  • Euro and EZ Capital Market Investors Watch Important ECB Court Ruling

  • Pound Mixed After Headline CPI Hits 15-Year Low

Dollar Weighs Growth Forecast Upgrade, FOMC Fodder and Active Counterparts

The Dollar struggled for both direction and conviction this past session, but the fundamental seas look heavier ahead. On an individual, the Dow Jones FXCM Dollar Index (ticker = USDollar) was little changed through the past session. On the economic front, the day’s docket was generally positive. Of the scheduled data to print, the NFIB small business optimism survey neared an eight-year high withjob openings at 14-year highs and the largest group reporting wage growth in seven. Considering small businesses account for the majority of jobs in the US economy, this was a particularly credible read of labor conditions after last week’s NFPs stirred concerns with its participation and wage measures. Furthering the positive read of the US economic backdrop, the World Bank also issued its updated 2015 growth forecasts from 3.0 to 3.2 percent which provides direct contrast to the downgraded Global expected pace from 3.4 to 3.0 percent.

This past session’s event risk touched upon all three major veins of Dollar strength: growth potential, support for the hawkish policy path and weakened competition. All three venues will be explored further this upcoming session. On the economic front, retail sales and MBA mortgage applications doesn’t hold the same level of poignant appeal as the NFIB figure, but they tend to generate more recognition and often volatility. The monetary policy implications will be leveraged with the Fed’s Beige Book – the assessment of economic conditions across districts to be used at the January 28 FOMC rate decision. Perhaps the greatest potential for the Greenback though lies with the contrast the Euro will present with the EU court ruling that could redefine the ECB’s stimulus path.

Euro and EZ Capital Market Investors Watch Important ECB Court Ruling

Top event risk over the coming 24 hours can be found in the Euro’s economic docket. An advisor for the EU Court of Justice is set to weigh in on legality of the OMT (Outright Monetary Transaction) program the ECB introduce back in 2012 to reinforce the vow made to do whatever was necessary to ensure the region’s financial and economic stability. Though non-binding, the courts tend to follow the assessment; and this opinion can undermine a significant safety net and shape the central bank’s next big step on a path of heavy policy easing. If the outcome is critical of the ECB’s reach, shaping an outright QE program similar to those of the US, UK and Japan will be extremely difficult, if not impossible. A hurdle to a full-scale government bond purchase program doesn’t condemn the group’s objective of increasing the balance sheet by €1 trillion. However, it will make it materially more difficult and likely piecemeal. If the Euro found some kind of relief from such an outcome as there isn’t a direct tap to stimulus, it wouldn’t last long. Furthermore, Europe’s capital markets would likely be unnerved by the limitations. As such, this could prove a global risk catalyst. Alternatively, an ‘all clear’ sign on QE would embolden ECB expectations for next week.

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