by Charalambos Pissouros

EUR Rebounds on ECB Headlines, CAD Slides on Kudlow’s Remarks; GBP Gains on Services PMI

EU 03 ECB 

EUR Rebounds on QE-end Reports; CAD Gets Hit by Comments on Splitting NAFTA Talks

The euro traded mixed against its G10 peers on Tuesday. It gained against JPY, CAD and USD in that order, while it underperformed versus GBP and CHF. The common currency ended the day virtually unchanged versus AUD, NZD, SEK and NOK.

EUR perf 060618

The euro has been in a sliding mode against its US counterpart during the European morning yesterday, but spiked higher later in the afternoon following a report citing sources saying that at next week’s meeting, ECB policymakers are likely to hold a discussion that could end up with an announcement on when they intent to end their QE program.

This may have come as a surprise to market participants, who following the latest turmoil caused by Italian politics may have thought that the Bank would refrain from taking such a decision so early. We were part of that camp too. Following the last ECB meeting, we noted that the Bank may have to communicate what happens after September at the next couple of meetings but given Draghi’s remarks that policymakers haven’t discussed plans for the June meeting, we saw July as a more likely candidate for such a move.

As for Italy, the new government won its first confidence vote yesterday in the upper house, the Senate. Today it is expected to face a vote in the lower house, the Chamber of Deputies, where Five Star and League also have a majority and thus, they are expected to secure a victory there too.

Ahead of the vote, Giuseppe Conte made his first speech as Prime Minister and outlined the new government’s spending plans, which led to fresh fears of exploding the nation’s already huge debt pile and perhaps breaching the EU’s budget rules. Italy’s FTSE MIB ended the day 1.18% lower, while the nation’s 10-year bond yields rallied around 8.4%. Yesterday, we noted that the uncertainties surrounding the matter are far from eliminated, despite the country sidestepping a new round of elections. Although, the new government reassured that a euro exit is not on its agenda, a potential conflict with the EU could bring the idea back into the limelight.

In any case, if the new government wins in the lower house as well today, we expect politics to take the back seat for a while and euro-traders to turn their gaze back to monetary policy. Any headlines that confirm or deny the aforementioned ECB reports could prove a source of volatility for the common currency. In this respect, we have ECB Executive Board member Peter Praet speaking today. Investors are likely to carefully scrutinize his comments for hints on whether officials are indeed planning to communicate the timing of a QE end next week.

The Canadian dollar underperformed against its European counterpart, hit by comments from Larry Kudlow, the White House’s top economic advisor. Kudlow said that President Trump is seriously considering holding separate bilateral trade talks with Canada and Mexico, which raised concerns that the US may scrap NAFTA. The Loonie recovered some of the lost ground following overnight reports that US Treasury Secretary Steven Mnuchin urged Trump to exempt Canada from tariffs.

As for our view, we believe that developments over the trade landscape are likely to continue being a headache for CAD-bulls. Although the BoC sounded hawkish last week, its future policy plans may well be affected by trade developments. Even if the Bank decides to hike in July, without any signs of ease in the global trade arena, it may choose to delay any forthcoming rate increases.

EUR/CAD – Technical Outlook

We have seen some recovery from EUR/CAD over the past few days, with the pair pushing higher from last week’s lows of around 1.4915. EUR/CAD continues to trade between the bounds of a downwards moving channel, taken from the 20th of March. The pair is currently knocking on the upper bound of that channel, but until it is broken, we remain sceptical on the upside potential.

Because the trend is still negative, we will stick to the downside and treat this current move higher as a small correction. A move back down towards the 1.5080 level and eventually a break of it could pull EUR/CAD towards the recent lows of 1.5000 or even the 1.4950 area. Below that, the pair could make its way towards the 1.4815 zone or the lower bound of the aforementioned channel.

Alternatively, if we start seeing a test again of the upper bound of the downwards moving channel, this might interest the bulls in breaking it and driving EUR/CAD higher. More bulls could start joining in and we could see the pair moving towards the 1.5240 zone first and then possibly for a test of the 1.5315 area. If after that, the momentum still remains to the upside, then we could see EUR/CAD traveling all the way up to 1.5440, a level last seen in the beginning of May.

2018.06.06 EURCAD 240 Logo

GBP Gains After the Better-than-expected UK Services PMI

The pound made a 180-degree turn. After ending Monday as the worst performer, it rebounded on Tuesday to gain against every other G10 currency.

GBP perf 060618

The catalyst behind sterling’s rebound may have been the better-than-expected UK services PMI for May. The index rose to 54.0 from 52.8, beating expectations of a fractional increase to 53.0. Following the above-forecast manufacturing and construction PMIs, the rise in the more-important services index may have revived hopes that following the soft Q1, the economy is now turning the corner.

UK PMIs 060618

This could have encouraged some market participants to put some bets regarding a near-term BoE rate increase, perhaps as early as August, back on the table. However, we prefer to stay on guard for now, given that next week we get the all-important UK employment and CPI data. We believe that accelerating wages and a rebound in inflation is needed in order for the August-hike case to strengthen notably.

GBP/CHF – Technical Outlook

Finally, there is a bit of recovery in GBP/CHF, which moved from its recent lows of around 1.3050 that were seen last week. However, the pair is still below the downwards moving trendline, drawn from the peak of the 27th of April, which is still a bearish sign for the pair. GBP/CHF has to make a clear break through the aforementioned trendline before we start examining the case of a trend reversal. For now, we could see a bit recovery to the upside, towards that trendline.

A break of the 1.3230 level could interest the bulls in driving the pair slightly higher towards the 1.3250 zone. Above that, GBP/CHF could make its way and finally test the previously mentioned downwards moving trendline. The area to watch there could be around the 1.3310 mark.

The RSI also supports this idea as it is currently sitting above 50 and pointing higher. The MACD also got above its 0 mark and its trigger line. All indicate towards some more upside correction for now, instead of a turn down and a trend continuation.

On the downside, a move below the 1.3150 level could open the way towards the last week’s lows at 1.3050. If that level is not able to withhold the rate from dropping, then we could see a slide lower towards the 1.2980 zone, a break of which could send the pair even lower to test the 1.2865 support area.

2018.06.06 GBPCHF 240 Logo

As for Today’s Events

During the European morning, we get Switzerland’s CPI for May, but no forecast is currently available. In April, the nation’s inflation rate stayed unchanged at +0.8% yoy. So, even if we see a small acceleration, inflation would still be well below the SNB’s inflation goal and thus, it is unlikely to alter policymakers’ plans. At their latest meeting, SNB officials revised down their inflation forecasts and they now see inflation staying a tick below 2% even in 2020. Most importantly, the forecasts are based on the assumption that interest rates will remain at current levels for the entire forecast horizon.

On top of that, the Swiss franc strengthened notably due to recent global uncertainties, especially the political turmoil in Italy. In our view, this is another factor supporting the case for the SNB to keep its interest rates and policy stance untouched.

Later in the day, from the US, we get trade balance data for April and the Unit Labor Costs Index for Q1. The nation’s trade deficit is expected to have widened slightly, while the Labor Costs Index is anticipated to have accelerated somewhat, to +2.8% qoq from +2.7%.

We get April trade data from Canada as well. Canada’s building permits for the same month, as well as the Ivey PMI for May are also coming out.



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As for the speakers, besides ECB’s Peter Praet, we also have BoE MPC member Ian McCafferty.