ECB In Focus, FOMC Minutes Debrief

News and Events:

Fed surprises markets, further USD weakness cannot be ruled out in medium/long term

Given the lacklustre pace of recovery of the US economy, most participants expected the Fed to stick to its initial plan: gradual rate tightening. Instead, the minutes of the March FOMC meeting revealed that the members discussed extensively the strategy to start unloading the $4.5 trillion of bonds and mortgage-backed securities that currently sit on its balance. Technically, the Fed did not actually discuss selling those assets but rather changing the committee’s reinvestment policy later this year. Indeed, the central bank is currently reinvesting all principal payments from its Treasury, agency debt and agency MBS portfolios, which has the effect to maintain unchanged the size of its portfolio.

Until now, Fed members were only vaguely discussing about unwinding its bonds portfolio. In addition, the balance sheet discussions only recently started to gain traction. The market did not expect the Fed to move that fast as most analyst were expecting the Fed would start fine-tuning its reinvestment policy in the middle of 2018. This surprise move caught investors off guard and forced them to reassess the US economic outlook as well as the effect on the USD. Indeed, choosing to unload the balance sheet instead of tightening short-term rate has the advantage to limit, to some extent, USD appreciation.

On Wednesday, the Dollar erased completely its pre-FOMC minutes’ gains and ended the day flat against most of its peers. For now, the market is still digesting the minutes and its potential impact on the greenback. Investors are definitely cutting risk, pushing equities lower and the Japanese Yen higher. Overall, the backdrop of political uncertainty in the European Union favours the USD in the short-term. However, the reflation trade in the US is, more than ever, being questioned by market participants as President Trump’s administration has been unable to carry out any of its planned reforms. Therefore, further USD weakness cannot be ruled out in the medium and long-term.

ECB minutes and Alexis Tsipras meets European Council President

Today’s investors will carefully watch the ECB minutes. Indeed, at their last meeting in March, it turned out that the European Central Bank was more hawkish than expected.

However, recent declarations from policymakers are cooling down this view and the minutes should bring the confirmation that the European institution should not move far away from the purchase of €60 billion of bonds until year-end.

We do not expect a strong market movement after the release. Markets are not pricing in a too strong narrowing of the divergence between the Fed and the EU.

Staying in Europe, Alexis Tsipras is going to meet European Council President Donald Tusk ahead of the Eurogroup, composed of Eurozone Finance Ministers, which will be held tomorrow (Friday). Tsipras hopes to renegotiate the bailout terms. We recall Greece is seeing its debt-to-GDP ratio exploding since the first bailouts and that massive growth is required to only reimburse the charge of the debt.

Today’s Key Issues (time in GMT):

• ECB President Draghi speaks in Frankfurt EUR / 07:00
• Mar CPI MoM, exp 0,20%, last 0,50% CHF / 07:15
• Mar CPI YoY, exp 0,50%, last 0,60% CHF / 07:15
• Mar CPI EU Harmonized MoM, exp 0,20%, last 0,60% CHF / 07:15
• Mar CPI EU Harmonized YoY, exp 0,50%, last 0,70% CHF / 07:15
• Mar Markit Germany Construction PMI, last 54,1 EUR / 07:30
• Mar Average House Prices, last 2.938m, rev 2.950m SEK / 07:30
• ECB Executive Board member Praet speaks in Frankfurt EUR / 07:30
• Mar Markit Germany Retail PMI, last 51,2 EUR / 08:10
• Mar Markit Eurozone Retail PMI, last 49,9 EUR / 08:10
• Mar Markit France Retail PMI, last 51,7 EUR / 08:10
• Mar Markit Italy Retail PMI, last 45,5 EUR / 08:10
• Apr 6 RBI Repurchase Rate, exp 6,25%, last 6,25% INR / 09:00
• Apr 6 RBI Reverse Repo Rate, exp 5,75%, last 5,75% INR / 09:00
• Apr 6 RBI Cash Reserve Ratio, exp 4,00%, last 4,00% INR / 09:00
• ECB’s Weidmann Speaks in Berlin EUR / 09:40
• May FGV Inflation IGP-DI MoM, exp 0,00%, last 0,06% BRL / 11:00
• May FGV Inflation IGP-DI YoY, exp 4,78%, last 5,26% BRL / 11:00
• Mar Challenger Job Cuts YoY, last -40,00% USD / 11:30
• ECB account of the monetary policy meeting EUR / 11:30
• mars.31 Foreigners Net Bond Invest, last $399m TRY / 11:30
• mars.31 Foreigners Net Stock Invest, last -$59m TRY / 11:30
• ECB Vice President Constancio speaks in Malta EUR / 11:45
• Feb Building Permits MoM, exp 1,30%, last 5,40% CAD / 12:30
• Apr 1 Initial Jobless Claims, exp 250k, last 258k USD / 12:30
• mars.25 Continuing Claims, exp 2030k, last 2052k USD / 12:30
• mars.31 Gold and Forex Reserve, last 399.0b RUB / 13:00
• Fed’s Williams Speaks on a Panel in Frankfurt USD / 13:30
• Apr 2 Bloomberg Consumer Comfort, last 49,7 USD / 13:45
• Mar Vehicle Production Anfavea, last 200385 BRL / 14:20
• Mar Vehicle Sales Anfavea, last 135665 BRL / 14:20
• Mar Vehicle Exports Anfavea, last 66268 BRL / 14:20
• ECB Executive Board member Praet speaks in Malta EUR / 16:40
• ECB Vice President Constancio speaks in Valletta, Malta EUR / 17:15

The Risk Today:

EUR/USD is now consolidating. The pair is heading lower since the pair failed to hold above former resistance given at 1.0874 (08/12/2017 high). Hourly support can be found at 1.0630 (intraday low). Stronger support can be found at 1.0494 (22/02/2017 low). Expected to see further short-term weakness. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD’s bullish pressures have faded abruptly. Hourly resistance is located at 1.2615 (27/03/2017 high) while hourly support can be found at 1.2324 (03/17/2017 low). Expected to show continued strengthening towards stronger resistance at 1.2775 (06/12/2016 high) if support area around 1.24 stands. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY‘s momentum is slowing down. Hourly resistance is given at 112.20 (31/03/2017 high). Stronger resistance can be located at 113.57 (16/03/2017 high) while support is given at 110.11 (27/03/2017 low). We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF is strengthening. Hourly support is given at 0.9814 (27/03/2017 low). Key resistance can be found at a distance at 1.0344 (15/12/2016 high). Expected to show another leg higher. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.