Euro Steady as ECB Sees Recovery Becoming Increasing Solid, But Discourage Talks of Stimulus Exit

Euro is staying in tight range against Dollar and Yen, and weakens against Sterling. ECB kept monetary policies unchanged today as widely expected. The key interest rate is held at 0.00%, marginal lending facility rate at 0.25% and the deposit facility rate at -0.40%. Asset purchase at was also kept unchanged at EUR 60b per month. ECB President Mario Draghi said in the post meeting press conference that "downside risks have further diminished" as data confirmed "cyclical recovery of euro area economy is becoming increasingly solid". And he also described the improving growth and recovery as "solid and broad".

However, he also sounded cautious that there are still many "fragilities" to worry about. And the central bank reiterated that it "stands ready to increase" stimulus if the outlook for growth and inflation worsens. Such language is seen as a sign to discourage talk of stimulus exit. Regarding the result of French election, Draghi emphasized that "we actually don’t do monetary policy based on likely election outcomes." And, "we have not seen sufficient evidence to alter our inflation outlook."

From Eurozone, German CPI accelerated to 2.0% yoy in April, up from 1.6% yoy and beat expectation of 1.9% yoy. German Gfk consumer sentiment improved to 10.2 in May, up from 9.8. Eurozone business climate rose to 1.09 in April, up from 0.83 beat expectation of 0.82. Economic confidence rose to 109.6, industrial confidence rose to 2.6, services confidence rose to 14.2. Consumer confidence was finalized at -3.6. Also from Europe, UK CBI realized sales rose to 38 in April. Swiss trade surplus came in at CHF 3.1b in March.

Markets yawned Trump’s Tax Plan

Markets had basically no reaction to US President Donald Trump’s tax reform plan. Trump revealed that there would be vigorous change to the tax system, for both individuals and businesses. For individuals, the new tax structure would reduce the number of tax brackets from seven to three (10%, 25% and 35%) and cut the top marginal rate from 39.6% to 35%. Meanwhile, several taxes, including the Alternative Minimum Tax, the estate tax, and the Obamacare tax on investment income, are repealed. For businesses, the corporate tax rate is reduced to 15%, from 35%. Tax rate for smaller pass-through businesses (such as partnerships) would also be 15%. Meanwhile, the reform plan proposes a switch to the territorial tax system under which US companies would only pay US tax on what they earn in the US. This is compared with the current system that US companies must pay tax on all their profits, regardless of where the profits are earned. The controversial border adjustment tax (BAT) does not appear in the announcement. Treasury Secretary Steve Mnuchin suggested that the current form of BAT might not work and there will be discussions on the revisions.

While the headlines look rosy, details on execution are not yet available. For instance, there is no information on how much of one’s income would apply to each of the three rates. Therefore, it is impossible to understand who the beneficiaries of the new system are. The huge cut in corporate tax rate might cost the government a -USD 2T loss in revenue. Alternative revenue sources for the government remained uncertain. Congress’ response to the proposal is the most critical as only it can make major tax law changes. The instant response of Democrats is condemnation of the plan as "fiscally irresponsible".

Released from US, initial jobless claims rose 14k to 257k in the week ended April 22, above expectation of 241k. Four week moving average dropped 0.5k to 242.25k. Continuing claims rose 10k to 1.99m in the week ended April 15. Also from US, trade deficit widened slightly to USD -64.8b in March. Wholesale inventories dropped -0.1% in March. Durable goods orders rose 0.7% in March, below expectation of 1.3%. Ex-auto sales dropped -0.2% in March, below expectation of 0.5%.

BoJ sounded most positive in 9 years

BoJ left monetary policies unchanged today as widely expected. Short-term interest rate target was held at -0.10%. And under the Yield Curve Control framework to guide 10 year bond yield to zero, the central bank will keep the annual asset purchase size at JPY 80T. BoJ sounded upbeat as it noted that "Japan’s economy has been turning toward a moderate expansion." It should be noted it’s the first time since 2008 that BoJ used the word "expansion" to describe the state of the economy. BoJ Governor Haruhiko Kuroda said in the press conference that inflation is expected to "accelerate towards 2%" even though it’s currently at around 0%. Meanwhile, Kuroda still sounded a bit cautious that "talking about a specific exit strategy now would cause undue confusion in markets."

In the quarterly report of Outlook for Economic Activity and Prices, the central bank lowered inflation forecast for the current fiscal year to 1.4%, down from January’s projection of 1.5%. Inflation forecast for fiscal 2018 was held unchanged at 1.7%. On the other hand, growth forecast for fiscal 2017 was revised up to 1.6%, from 1.5%. For fiscal 2018, growth is projected to be at 1.3%, up from prior estimation of 1.1%.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0855; (P) 1.0903 (R1) 1.0950; More….

EUR/USD is staying in tight range below 1.0949 temporary top and intraday bias remains neutral for consolidations. At this point, another rise could be seen as long as 1.0777 support holds. But still, rise form 1.0339 is seen as a corrective move. Hence we’d pay attention to topping signal even if EUR/USD rises through 1.0949. On the downside, below 1.0777 minor support will turn bias to the downside for 1.0569 support first.

In the bigger picture, as long as 1.1298 key resistance holds, whole down trend from 1.6039 (2008 high) is still expected to continue. Break of 1.0339 low will send EUR/USD through parity to 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. However, considering bullish convergence condition in weekly MACD, break of 1.1298 will indicate term reversal. this would also be supported by sustained trading above 55 week EMA.

Economic Indicators Update