Sunrise Market Commentary
- Rates: Will Draghi trigger new Bund sell-off?
The ECB is expected to keep its policy unchanged. However, Draghi’s language at the press conference might reveal more optimism on economic growth and hints about a future unwinding of the ECB’s current very accommodative monetary policy stance. The market reaction could be a copy of the one after the March policy meeting (bear steepening). - Currencies: Trump tax plan no help for the dollar. Focus turns to Draghi
Yesterday, the euro fall prey to modest profit taking. However, the lack of details of the Trump tax plan prevented further USD gains. The BOJ left its policy unchanged with little impact on the yen. Today’s focus will be on the ECB meeting. If Draghi would sound more optimistic, he might inspire some further unintended euro gains.
The Sunrise Headlines
- US equities ended marginally weaker as they were not impressed by Trump’s tax plan. Overnight, Asian stock markets also correct lower with China marginally underperforming (‐0.5%).
- The Trump administration said it was no longer considering pulling out of NAFTA. Mexico, Canada and the US will soon begin talks over renegotiating the agreement.
- President Trump’s top economic team unveiled what they called the biggest tax cut in US history, proposing a sharp reduction in corporate taxes and a simplification of individual rates they said would unleash economic growth.
- The BoJ kept its policies unchanged while lowering its inflation forecast. Any exit from its unprecedented monetary easing remains far away. The central bank made a small increase to its growth forecasts for this fiscal year and next.
- Global oil discoveries fell to a record low in 2016, the International Energy Agency says, raising fresh concerns about the potential for a petroleum‐supply shortage as soon as 2020.
- Profits earned by China’s industrial firms rose 23.8% in March from a year earlier, buoyed by a continued construction boom, though the pace of growth eased from multi‐year highs seen in previous months.
- Today’s eco calendar heats up with US trade balance, durable goods orders, weekly jobless claims, German Inflation, EMU EC economic confidence and central bank meetings in EMU and Sweden. Italy and the US tap the market
Currencies: Trump Tax Plan No Help For The Dollar. Focus Turns To Draghi
Tax plan no help for USD. Focus turns to Draghi
On Wednesday, the combined rally of EUR/JPY, USD/JPY and EUR/USD continued in Asia, but the post‐Macron risk trade slowed in Europe. This caused some profit taking on the euro as investors reduced positions ahead of the Turmp tax plan and the ECB policy meeting today. The Trump tax plan didn’t bring additional info. The announcement triggered a slight setback in US equities and in the dollar. EUR/USD reversed part of intra‐day losses and finished the session at 1.0904 (from 1.0926). USD/JPY closed the session little changed at 111.09.
Overnight, the BOJ as expected left its policy unchanged. The bank is rather upbeat on the economy. Still, It cut its inflation forecast for this fiscal year, suggesting that no policy tightening is to be expected anytime soon. The Bank expects the 2% target to be reached during the fiscal year 2018/19. The reaction of the yen is modest. USD/JPY hovers in the 111.20/25 area. Asian equities trade with limited losses following WS. EUR/USD hovers little changed n the 1.09 area. The CAD and MXN rebound as Trump said he doesn’t intend to scrap the NAFTA pact.
Today, the eco calendar is well filled. In EMU, the EC confidence data and the German inflation data take centre stage. German HICP inflation is expected to rebound to 1.9 % Y/Y from a surprise drop to 1.5% Y/Y. We consider the expected rebound as quite strong. A lower than expected figure might be slightly negative for the euro. The US calendar heats up with the trade balance, the durable goods orders and the weekly jobless claims. For the durable orders, we see downside risks. The key feature for the (FX) trading will be the ECB meeting. (see our preview). Given uncertainty about the French elections, we expect the ECB to try to avoid volatility. So, the core of its current policy will be confirmed. It is possible that the risk assessment is upgraded to broadly balanced from tilted to the downside. There is a small chance that the reference to even lower rates is scrapped from the forward guidance. However, we think that the June and the September meetings will be crucial.
In a day‐to‐day perspective, the eco data might be mixed for EUR/USD trading. Market disappointment on the Trump tax plan might be slightly negative for the dollar. As was the case last month, the ECB will try to avoid hints about policy normalisation. However, hints on an improvement in the economic context might be seen as opening the door for a change in policy. In such a scenario, EUR/USD might revisit the recent highs. Even a test of the 1.10 barrier might be on the cards.
This week, FX trading was driven by the global risk trade as (European) political event risk eased. This supported USD/JPY but also EUR/USD and EUR/JPY. Market speculation that the decline in EMU political event risk could bring forward the ECB normalisation process supports the euro, too. ECB’s Draghi will downplay this speculation. Question is whether the (FX) market will believe it. At the same time, Trump’s tax plan is no immediate support for the dollar. So, for now, a cautiously euro positive momentum might persist. From a technical point of view, This week’s rebound of USD/JPY suggests a bottoming out process might have started, but the pair needs to regain the 112.20 level (neckline ST double bottom) to improve the picture. EUR/USD extensively tested the topside of the MT range (1.0874/1.0906 area) late March. The pair returned to the range top after the French election and set minor new highs. We look out how this test turns out. If EUR/USD would regain the 1.10 barrier, next resistance comes in in the 1.1145/1.13 area (US pre/post‐election swings).
EUR/USD maintains gains. Range top under heavy strain
EUR/GBP
Cable continues to challenge recent top
Yesterday, the focus of sterling trading was on external factors, including on the Trump tax plan. Euro profit taking dominated the price action in EUR/GBP. EUR/GBP closed the session at 0.8487. Initially, the dollar held relatively strong against sterling, but cable regained some ground on USD softness after the Trump Tax plan. The pair closed the session at 1.2848.
Today, the UK calendar contains the CBI retail data/distributive reported sales. A slight decline in the sales momentum is expected. However, the figure will have to be really negative to trigger a meaningful decline of sterling. Sterling took a good start against the euro and the dollar this morning. However, if the euro would stay well bid on the ECB policy statement, it could also help to put a floor for the EUR/GBP. Cable currently profits from USD softness.
Early last week, EUR/GBP dropped below EUR/GBP 0.84 support, (temporary) improving the sterling picture. The pair came within reach of the key 0.8305 support (Dec low), but no real test occurred. After this week’s rebound, the range bottom is better protected. Longer term, Brexit‐complications remain a potential negative for sterling. Of late, this was not the focus of sterling trading. Nevertheless on technical considerations we are inclined to reconsider a cautious EUR/GBP buy‐on‐dips approach.
EUR/GBP jumps on French election. 0.83 range bottom looks safe for now. Downside better protected due to euro strength
