The ECB minutes from the January policy meeting confirmed much of what we learned from President Draghi at the press conference following that gathering. There was wide agreement among the Governing Council that despite the latest progress in headline inflation, there were no signs yet of a convincing upward trend in underlying inflation and as such, the ECB will continue to "look through" improvements in the headline CPI. Furthermore, the minutes made it crystal clear that there is very little appetite among the officials to begin scaling back asset purchases anytime soon. They indicated that this could put at risk the latest improvement in inflation expectations, as well as the prospect of a sustained uptrend in inflation. These signals amplify our view that the ECB is likely to keep its policy stance intact in the foreseeable future, at least until there is material progress in the bloc’s core CPI and the upcoming political risk events in Eurozone are out of the way.
Given that the Bank confirmed what we already know, that it will likely remain dovish, there was little reaction in the euro on the release of these minutes. The currency even managed to outperform most of its major counterparts in the following hours. EUR/USD continued to trade north on Thursday but the recovery was stopped near the 1.0680 (R1) level and the prior upside support line taken from the low of the 16th of January. Although the pair is trading above the short-term downtrend line drawn from the high of the 2nd of February, the fact that it remains below the aforementioned prior upside support line, makes us switch to flat with regards to the short-term picture.
However with regards to the bigger picture, we believe that as we approach the upcoming elections in the Netherlands and France, political developments and uncertainty could begin to weigh increasingly more on the common currency. Even if EUR/USD continues to trade higher for a few more days, as long as it remains below the obstacle zone of 1.0800, the medium-term outlook remains cautiously negative from a technical standpoint as well. We expect the bears to take charge again at some point soon and perhaps aim for another test near the 1.0500 area in the weeks to come. However, given that we still have risks surrounding Trump’s fiscal and tax plans, our favorite proxy to exploit any forthcoming euro weakness is EUR/JPY, considering that the yen may enjoy some safe-haven flows should Eurozone’s political risks heighten further.
Today’s highlights
During the European day, we get UK retail sales for January. The forecast is for both the headline and the core retail sales rates to have rebounded following a very sharp decline in December. The forecasts are supported by the nation’s consumer sentiment indicators, such as the TR/IPSOS and the Gfk indices, both of which showed increased optimism in the month. Although a confirmation that UK consumers continue to spend at a robust pace could support the pound on the news, we remain cautious with regards to the future performance of both retail sales and sterling. A strong case can be made that consumers’ real income growth is likely to be squeezed by rapidly rising inflation in coming months. This could be a factor that weighs on consumer spending, a concern the BoE outlined in its latest Inflation Report as well.
GBP/USD is currently trading between the upside support line drawn from the low of the 19th of January, and a short-term downside line taken from the peak of the 9th of February. This keeps the short-term bias of the pair flat for now, but strong retail sales today could prove the catalyst for a break above the aforementioned downside line. This is possible to lead to a test at 1.2545 (R1), where a break may trigger extensions towards 1.2600 (R2).
With regards to GBP’s broader outlook, we maintain the view that despite the rebound following Theresa May’s Brexit speech, as we approach the triggering of Article 50 in late March, the bigger story that drives sterling will be the likelihood of a "soft" versus a "hard" Brexit. For the time being, the signals from both sides suggest we are headed for a "hard" exit. The UK wants control of immigration, while the EU will not allow full access to the single market in such a case. As such, we don’t expect any potential short-term rebounds in Cable to lead to a healthy uptrend. After all, the price structure on the daily chart suggests that the medium-term path remains to the sideways. The pair has been oscillating between 1.2100 and 1.2850 since the 7th of October. With that in mind, we expect future rebounds to remain limited below 1.2850, the upper bound of that range.
From Sweden, we get inflation data for January, and the forecast is for a decline in both the headline and the underlying CPI rates. Considering that the notable surge in both rates in December was fuelled by some temporary factors, such as rising airfare prices, we share the view for a tick down in January. Something like that could bring SEK under renewed selling pressure.
We do not have any speakers scheduled for today.
