ECB Signals Tapering; Interest Rates Untouched “at Least Through Summer 2019”
The euro tumbled against all the other currencies yesterday following the ECB policy decision. The common currency underperformed the most against USD, JPY and GBP in that order, while it lost the least ground against SEK and NOK.
Yesterday, the big event was the ECB policy decision. The ECB decided to keep monetary policy unchanged, but signaled that after September it will reduce the pace of its asset purchasing program to EUR 15 billion until the end of December, when the program will end. That said, the Bank noted that this decision will be “subject to incoming data confirming the Governing Council's medium-term inflation outlook”. What’s more, officials said that they expect interest rates to remain at present levels “at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path”.
The euro came under strong selling interest at the time of the decision, despite the tapering announcement. In our view, investors sold the currency heavily as the announcement had a dovish flavor. First, the fact that the tapering remains subject to incoming data means it is far from a certain event in our view. Second, the Bank’s forward guidance on interest rates may have prompted those expecting a hike in mid-2019 to push back their expectations. The guidance that interest rates will stay untouched at least through summer 2019 means that they could rise in September 2019, but also well thereafter, not earlier.
As for the press conference following the decision, in the introductory statement, President Draghi noted that “The latest economic indicators and survey results are weaker but remain consistent with ongoing solid and broad-based economic growth”. When asked about interest rates, he said that “Through the summer is intentionally not precise”. “There is a desire to maintain optionality in each and every part of this decision”, the President added. In our view, this shows that although the current state of the economy is not worrisome for the Bank yet, officials prefer to maintain flexibility on their future decisions, in case things turn worse than expected.
Summarizing, the euro’s reaction was a clear “Buy the rumor, sell the fact” play. Investors bought the currency heading into the meeting in anticipation of a QE-decision, but sold it massively as the decision was accompanied with a cautious stance. Given that now market participants may have little to no room for bringing forth their hike expectations, we would expect the euro to stay under selling interest in the near term. What’s more, we expect incoming data to attract even more attention moving forward as investors may try to assess whether they support yesterday’s decision, or not.
EUR/USD – Technical Outlook
EUR/USD collapsed yesterday and managed to lose around 215 pips from the opening till the close of the day. Looking at the daily chart, we can see that the pair is now testing the long-term upwards moving trendline, taken from the low of 3rd of January last year. Certainly, for now, EUR/USD is trading above that trendline, but with all this Euro-selling, will the line hold? For now, we remain neutral and continue to observe the price action.
Judging by yesterday’s trading activity, we could expect to see some more selling kicking in today. If so, then the aforementioned trendline could get broken and the bears could push the pair towards May’s lowest point, at around the 1.1510 level. A break below, could interest some more bears joining in the selling action and driving the pair towards the next key area of support at 1.1450.
The oscillators, the RSI and MACD, both have turned lower and are now supporting the potential downside scenario. The RSI moved lower from the 50 barrier and currently, it is pointing slightly to the downside. The MACD, already negative, also changed its course and now is aiming lower, testing its trigger line at the same time.
Alternatively, if the previously mentioned upwards moving trendline is able to withhold the rate from dropping lower, then EUR/USD could retrace back up, in order to recover some of its yesterday’s losses. A move back above the 1.1615 mark could open the path back up to the 1.1650 level. If the buying momentum starts to pick up again, then there could be a chance of seeing the bulls lifting the rate to the key area of resistance at the 1.1720 level, which yesterday acted as an important area of support that got broken to the downside.
BoJ Keeps Policy Steady; Downgrades Inflation Language
Overnight, during the Asian morning Friday, it was the turn of the Bank of Japan. The Bank decided to keep its ultra-loose policy unchanged via an 8-1 vote. Once again, the lone dissenter was Goushi Kataoka, who reiterated his view that they should buy Japanese Government Bonds (JGBs) so that long dated bond yields fall further.
Specifically, the Bank repeated that it will continue with its QQE with Yield Curve Control policy “aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner”. That said, it downgraded its language on inflation. The Bank said that inflation “is in the range of 0.5-1.0 percent”, while in April it noted that it “is around 1 percent”. As for the nation’s economic activity, the Bank noted that “Japan’s economy is likely to continue its moderate expansion”, without any mention to the Q1 contraction. As for the yen, it slid somewhat at the time of the release, perhaps on the downgrade in the inflation language.
The overall message we got from the meeting is that the Bank is still well distant from starting to think about a stimulus exit. This combined with a Fed that keeps raising rates, and signals more to come, means that the monetary policy divergence between the US and Japan is likely to keep widening. If seen in isolation, something like that should work in favor of USD/JPY. However, we have to repeat that monetary policy divergence is not the only game in town for this currency pair. Due to the yen’s safe-haven status, USD/JPY tends to respond largely to sentiment changes in the global financial arena.
AUD/JPY – Technical Outlook
Looking at the bigger picture, AUD/JPY continues to trade within a rising channel since around the 22nd of March. But yesterday’s trading was dictated by the bears, who drove the pair lower, towards the middle of that channel. From the short-term perspective, we could see a continuation to the downside, targeting the lower bound of the channel.
For now, we will remain bearish and aim for lower levels. Another break below the 82.60 area could lead to a test of yesterday’s lows of around 82.35. If the bears remain in the driver’s seat, then AUD/JPY could end up falling to the 82.00 level, a break of which is likely to open the path towards the 81.50 zone. Slightly below that zone lies the lower bound of the aforementioned channel.
We could also see bit of retracement to the upside towards the 83.00 level, from which AUD/JPY could fall back down and make its move lower, towards the previously mentioned levels.
The RSI, already below 50, has continued drifting lower, heading towards its 20 zone. The MACD is below both its zero and its trigger lines, pointing down as well. Both oscillators are indicating weakness for AUD/JPY.
Alternatively, a break above the 83.00 mark could interest the bulls to drive the pair a bit higher to test the 83.40 level, or even the 83.50 area. If the area is not able to stop the rate from rising, the AUD/JPY could make its way back up to the 84.00 zone.
As for Today’s Events
During the European day, we get Eurozone’s final CPIs for May. As usual, expectations are for the final prints to confirm the preliminary estimates and show that headline inflation accelerated to +1.9% from +1.2%, while the core rate rose to +1.1% yoy from +0.7%. Eurozone’s yoy wage growth rate for Q1 is also coming out, as well as the bloc’s trade balance for April.
In the US, industrial production is forecast to have slowed to +0.2% mom in May from +0.7% in April, while the New York Empire State manufacturing index for June is anticipated to have declined to 19.10 from 20.10. The preliminary UoM Consumer Sentiment index for June is also coming out, alongside the 1-year and 5-year UoM inflation expectations.
From Canada, we get manufacturing sales for April. Expectations are for a slowdown to +0.6% mom from +1.4%.
As for the speakers, we have one on today’s agenda: ECB Executive Board Member Benoît Cœuré.
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