Today, the highlight will be the ECB rate decision, followed by a press conference from President Draghi. The forecast is for no change in policy. On Tuesday, the euro surged following a Reuters report that the Bank may communicate a more optimistic bias at its coming meetings. We think it is far too early for that to happen at this gathering. The recent concerns of the officials with regards to a surge in Eurozone’s bond yields, combined with the slowdown in the core CPI for March, suggest that the Bank could stay patient for now and wait at least until the June gathering to communicate a more upbeat bias. By that time, political risks that keep a risk premium on European yields may have dissipated further, and the bloc’s core CPI may have picked up steam again.
As such, we think that Draghi will probably maintain a cautious tone overall and avoid fueling any tapering expectations today. The euro may experience a pullback in case such signals are seen as dovish, but given the currency’s short-term uptrend, we would expect any negative reaction to remain relatively short-lived.
EUR/USD is already in a retreat mode. Yesterday the pair pulled back after it found resistance near the crossroad of the 1.0955 (R2) level and the upside resistance line drawn from the peak of the 2nd of February. However, given that the rate is trading above the longer-term downtrend line taken from the peak of the 3rd of May 2016, we consider the outlook to be positive. We would treat any slide on Draghi’s comments as an extension of yesterday’s correction and we see the likelihood for such a retreat to stay limited near the 1.0800 territory.
Trump says he will not immediately scrap NAFTA; CAD & MXN jump
CAD and MXN both experienced a relief bounce during the Asian morning Thursday, following news that President Trump will not immediately scrap NAFTA, and will instead renegotiate it. This announcement followed several media reports yesterday that the US administration may issue an executive order declaring its intention to withdraw from the trade agreement. Although these news could keep CAD and MXN supported for a few days, any sustained positive reaction in these currencies seems unlikely, at least not until the trade landscape clears out.
USD/CAD tumbled after it hit the 1.3645 (R3) resistance to stop at the 1.3530 (S1) support level. The rate is now back below the 1.3600 (R2) territory, which is the upper bound of the sideways range it has been oscillating within since September. Therefore, we expect the pair to stay within that range and the slide to continue for a while. A clear dip below 1.3530 (S1) is possible to initially aim for the next support of 1.3490 (S2), defined by Tuesday’s low.
As for the US tax announcement yesterday, it was disappointing overall, offering no concrete details regarding the planned reforms, other than what we already knew from media reports and leaks over the past days. Perhaps due to the lack of clarity, both USD and US stock indices moved lower in the aftermath.
BOJ meeting: No surprises
Overnight, the BoJ kept its policy unchanged. The meeting statement contained no major surprises, with the Bank upgrading its assessment for the Japanese economy, but revising down its inflation forecasts. Perhaps due to the lack of new information, there was no reaction in JPY. We continue to expect the officials to keep their framework of QQE with yield curve control intact for the foreseeable future.
As for the rest of today’s highlights:
In Sweden, the Riksbank’s policy decision will be in focus. Expectations are for this Bank to stand pat as well. At the latest gathering, the Bank shifted to a much more dovish bias, expressing heightened concerns with regards to the strength of SEK. With data after that gathering showing that the nation’s CPI slowed in March, we doubt that the Bank will change its dovish tone. This could hurt SEK.
On the indicators’ front, Germany’s preliminary CPI for April is expected to have accelerated, but given that these data will be released a few minutes ahead of Draghi’s press conference, they may attract less attention than usual.
From the US, we get durable goods orders for March. Both the headline and the core figures are expected to have slowed from previously. The forecasts are supported by the nation’s ISM manufacturing PMI for the month, where the New Orders sub-index slid somewhat. Something like that could hurt USD somewhat.
EUR/USD
Support: 1.0855 (S1), 1.0825 (S2), 1.0800 (S3)
Resistance: 1.0915 (R1), 1.0955 (R2), 1.1000 (R3)
USD/CAD
Support: 1.3530 (S1), 1.3490 (S2), 1.3455 (S3)
Resistance: 1.3560 (R1), 1.3600 (R2), 1.3645 (R3)
