The euro pulled back briefly yesterday, after media reports familiar with ECB sources suggested that markets misinterpreted ECB President Draghi’s comments on Tuesday. Investors had interpreted Draghi’s remarks as being on the hawkish side, but these reports said the speech was intended to be balanced.
Our own view is that the ECB appears to be uncomfortable with the elevated speculation regarding an eventual QE-exit, as a rapidly appreciating euro and rising euro area bond yields could weigh on inflation and make the Bank’s job of bringing it back to target even harder. Overall, we still believe that the Bank is likely to continue shifting towards a more upbeat tone and that the euro’s broader outlook remains positive. The market appears to share our view, considering that even though the euro tumbled on these reports, the currency quickly recovered all its losses to trade even higher in the following hours.
EUR/JPY has been in a rally mode the last few days, especially following the break above the long-term downside resistance line taken from the peak of the 7th of June 2015. We believe that following that break, the medium-term outlook of the pair has turned positive and that the move above 127.80 (S1) may have opened the way for the psychological zone of 130.00 (R1). Nevertheless, given that the rally appears overextended, we would stay careful that a corrective setback may be on the cards before the bulls decide to take charge again.
Carney boosts sterling; Queen’s Speech in focus
The BoE Governor shifted to a somewhat hawkish tone yesterday, hinting that he could support a rate hike in the upcoming policy meetings. Carney said that the removal of monetary stimulus is likely to become necessary as the trade-off facing the MPC continues to lessen. He added that a hike may depend mainly on whether weaker consumption growth is offset by stronger business investment, and on whether wages begin to firm.
The result was a surge in the pound as these remarks may have caught investors by surprise, considering that just last week, Carney was perceived as dovish when he said “now is not the time to raise rates”. The question now is: Will the BoE actually hike? We think that much will depend on wage growth, which has been lackluster so far. Unless it picks up notably, any policy tightening seems unlikely, in our view. Having said that, the number of MPC members willing to support a hike appears to be increasing. McCafferty and Saunders already voted for a hike in June, while Haldane and now Carney both hint they could support one in coming months as well.
Turning to UK politics, the focus today may be on the Queen’s Speech vote. Importantly, the Tory-DUP deal is now finalized. Thus, the 10 DUP MPs are expected to vote for the Speech, which implies Theresa May is likely to keep her job as PM. If all goes as planned and Parliament approves the Speech, political uncertainty in the UK could dissipate further, and market focus is likely to turn to headlines surrounding the Brexit negotiations. In this scenario, GBP could gain, but given that this is widely anticipated, any positive reaction may be modest. On the other hand, should lawmakers reject the Speech, GBP could tumble on the increased uncertainty over who will be the next PM, as well as the probable delay of the crucial EU-UK talks. Looking a few days ahead though, the prospect of a Labour government or another election could result in a stronger pound overall, as the likelihood of a hard Brexit will probably diminish.
GBP/USD skyrocketed on Wednesday following Carney’s rhetoric to emerge above the key resistance (now turned into support) territory of 1.2850 (S2). Subsequently, it broke above the crossroad of the 1.2910 (S1) barrier and the downside resistance line taken from the peak of the 18th of May. In our view, this keeps the door open for further advances and a positive vote on the Queen Speech today may be the trigger for something like that. A clear break above 1.2975 (R1) is possible to open the way for our next resistance hurdle of 1.3015 (R2). In the unlikely scenario of the Speech being rejected, the pair may tumble back below 1.2910 (S1) and perhaps challenge the 1.2850 (S2) territory as a support this time.
As for today’s economic data:
In Germany, the preliminary CPI rate for June is expected to have ticked down. Such a decline could hurt the euro somewhat, but we would like to stress that Germany reports only a headline, not a core, inflation rate. Thus, a small slide in this rate could be owed mainly to movements in the prices of volatile items, and may not necessarily be descriptive of underlying inflationary pressures in Eurozone’s economic powerhouse.
From the US, we get the final estimate of GDP for Q1, but considering that Q2 is almost over, we think that these data are likely to be viewed as outdated and thus any reaction in USD may be limited.
EUR/JPY
Support: 127.80 (S1), 126.45 (S2), 125.70 (S3)
Resistance: 130.00 (R1), 132.10 (R2), 134.65 (R3)
GBP/USD
Support: 1.2910 (S1), 1.2850 (S2), .1.2795 (S3)
Resistance: 1.2975 (R1), 1.3015 (R2), 1.3050 (R3)
