Draghi Has a Fight on His Hands

Draghi did what he could to push sovereign QE forward but it's clear that ECB hawks have some clout. The euro jumped and was the best performer along with CHF while the Aussie lagged. Markets will have time to digest and get ready for non-farm payrolls because the Asia-Pacific calendar is light. As USDJPY broke above 120, it brought our long closer to the final target, alongside AUDCAD and USDCAD. USDCHF also remains open.

Draghi was careful not to promise QE and said the governing council will reassess the outlook early next year but warned that early 2015 doesn't mean January. He also hinted it was a contentious meeting saying the ECB doesn't need unanimity to act.

The lack of a commitment to do more came despite a dramatic cut in 2015 GDP and inflation forecasts. Growth was slashed to 1.0% from 1.6% and inflation to 0.7% from 1.3% in the Sept forecast – and that's without fully taking into account the latest fall in oil prices.

For almost any central bank, that kind of deterioration in the outlook would prompt some kind of response but the ECB, as usual, wants to wait and see. At this point it's a tough call whether QE will come in Q1.

After the press conference, leaks suggested half the 6-member Executive Board is against QE and several national central bank leaders also surely oppose. That contrasted with a report saying the ECB will prepare measures that could be voted on in January.

The euro was extremely volatile and turned around on at least a half-dozen headlines. The range was 1.2281 to 1.2456 and EUR/USD finished at 1.2378. The days ahead will feature more leaks and conjecture so headline-watching will be critical.

In all the ECB excitement, USD/JPY broke the 120 level for the first time in 7 years. The pair squeezed up to 120.26 but then tumbled to 119.36 in volatile trading. Part of the fall was on apprehension ahead of NFP. Long-term bulls may also have been ringing the register.

Non-farm payrolls is the key event to close the week but it will probably be more instructive about how the US dollar reacts to good/bad news than the news itself. We're getting close to year-end and dollar bulls may sell into strength or continue to pile in.