Markets:
The ECB kept its monetary policy and forward guidance as expected unchanged. The tone of Draghi’s press conference reflected recent comments made in a speech. The central bank admits that recent data point to some moderation, coming off exceptionally high levels. Data remain consistent with a solid and broad-based expansion, but there are more prominent risks coming from global factors. The ECB now builds in some caution in reading recent developments tempered by an unchanged confidence that inflation will converge to the central bank’s 2% inflation aim over the medium term. That’s why the council didn’t discuss the monetary policy stance today. The ECB wants to know if the current setback is temporary or permanent and if potential output growth increased or not. Prudence, patience and persistence remain the key words. Headline inflation is expected around 1.5% for the rest of the year while the ECB sees some encouraging signs from wage growth. Finally, president Draghi stepped up his usual rhetoric for implementing structural reforms. Overall, today’s ECB meeting didn’t contain much new info. The fact that monetary policy wasn’t discussed might imply that changes to the forward guidance could only occur in July rather than in June.
The rise of core/US yields and of the dollar took a breather this morning as markets looked forward to the ECB’s policy decision. The ECB as expected left its policy unchanged. Markets apparently feared a soft assessment from president Draghi. EUR/USD tested the 1.2155 range bottom while European/US yields declined before the start of the press conference. ECB president Draghi gave a balanced assessment on recent developments with respect to growth and inflation. In the end, he brought little new for markets. Core US and German yields declined in a daily basis, but this was probably a repositioning/correction on the recent rise in global interest rates, rather than a reaction to Draghi. The US yield curve bull flattens with yields declining by 1 bp (2-y) to 3.5 bps (10-y). The European yield curve shows a similar pattern with yields easing between 0.5 bps and 2 bps (30-y). EUR/USD rebounded off the 1.2155 support and trades again in the high 1.21 area. Draghi was not soft enough to trigger a sustained break of EUR/USD below 1.2155. Some ST moderation in the recent USD rally was maybe also (slightly) at work. USD/JPY hovers in the low 109 area. The upcoming US data rather the ECB assessment will probably decide on the next move on core yields and the dollar.
Sterling succeeded a cautious rebound against the euro over the previous days, reversing part of the sterling losses that occurred after BoE Carney questioned a May rate hike last week. At the same time, the UK currency lost ground against a strong dollar. Sterling sentiment improved further today. We didn’t see any important news. UK eco data were second tier and close to expectations. Regarding Brexit, the debate on the customs union continues. EU negotiator Barnier again opposed the idea that the UK might get a tailor-made solution. Sterling still succeeded a constructive intraday performance though. EUR/GBP trades in the 0.8715 area. Cable rebounded off the 1.39 area and trades again in the 1.3985 area.
News Headlines:
The Riksbank, Sweden’s central bank, kept its main (repo-)rate unchanged at -0.50%, saying underlying inflation has been unexpectedly low recently. Due to inflation uncertainty, it postponed its guidance on the first rate hike until the end of the year. The Swedish krona weakened and is testing the cyclical 10.48 top in EUR/SEK.
