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by Charalambos Pissouros

No Material Progress in US-Mexico Talks, ECB Enters the Spotlight

Most EU and US indices closed in positive territory again yesterday, as investors kept cheering Fed officials’ willingness to lower interest rates. That said, risk appetite eased somewhat during the Asian trading as the discussions between US and Mexican officials ended without yielding any material progress. As for today, the spotlight will turn to the ECB monetary policy decision, with market participants eager to find out whether the Bank will push further back the timing of when it expects interest rates to start rising, and whether there was any discussion over additional policy tools.

EU and US Equities Continue to Gain, Asian Bourses Trade Mixed

The dollar rebounded yesterday and traded higher against all the other G10 currencies on Wednesday and during the Asian morning Thursday. The main losers were NOK, AUD and GBP, while the currencies against which the dollar gained the least were NZD and SEK and JPY.

US performance G10 currencies

Although not so clear by the G10 performance, the strengthening of the dollar, and the resistance of the yen suggest that risk appetite may have eased at some point. Most EU and US indices ended in positive territory again, but during the Asian session, the performance was mixed with Japan’s Nikkei closing virtually unchanged and China’s Shanghai Composite sliding 1.17%.

Major global stock indices performance

For the most part of the day, markets continued to cheer Fed officials’ willingness to lower interest rates in order to avert a steep economic slowdown. Following dovish remarks by Fed Chief Powell and St. Louis Fed President James Bullard, Board Governor Lael Brainard said “We’ll be prepared to adjust policy to sustain the expansion”, enhancing the case for borrowing costs to be lowered in the months to come. According to the Fed funds futures, a 25bps rate decrease is now more than fully priced in for September, while the probability for something like that to happen as early as in July has risen to 56% from 52% yesterday. Another cut is factored in for November.

Fed funds futures Market vs FOMC rate expectations

During the US session, news that US and Mexico could find common ground and avoid US tariffs on Mexican goods, fueled further investors’ upbeat morale. That said, market participants turned hesitant during the Asian morning today, as the discussions between US and Mexican officials ended without yielding any material progress. “Progress is being made, but not nearly enough!”, US President Trump said. Talks are likely to continue today, so after the ECB gathering (see below), traders may focus on headlines surrounding that front.

As for our view, it remains the same as yesterday. The markets could turn risk-on again due to the elevated bets that the Fed would fight against the probability of an economic downturn, but the trade-war chapter, which has been the main catalyst for market turbulence for around a year, is not closed yet. We would like to see concrete signals that the US has reached common ground with China, Mexico, Japan, and other nation it conflicts with, before we trust a long-term recovery in equities and the broader market sentiment.

S&P 500 – Technical Outlook

S&P 500 has been in a rally mode since Tuesday, when it hit support near Monday’s low, at around 2732, and rebounded. The index broke several resistance (now turned into support) barriers, and yesterday, it managed to overcome the downside resistance line drawn from the peak of May 3rd. In our view, this suggests that the index has room to recover further, but we would like to see a clear break above 2840 before we get more confident on that front.

A decisive move above 2840, a resistance defined by the highs of May 24th and 28th, would also drive the price above the 200-EMA on the 4-hour chart, as well as above the 50-EMA on the daily chart. This could encourage more bulls to join the action and may initially pave the way towards the 2868 territory, marked by the highs of May 21st and 22nd. Another break, above 2868, could extend the advance towards the high of May 16th, at around 2892.

Looking at our short-term oscillators though, we see that the RSI has slowed down after hitting its 70 line, while the MACD, although above both its zero and trigger lines, shows signs that it could start topping. These indicators detect slowing upside speed and suggest that a corrective retreat may be on the cards before the next leg north.

However, in order to turn bearish again, we would like to see a clear return back below the aforementioned downside line and the 2790 zone.  Such a dip could allow declines towards the 2763 zone, marked by Tuesday’s high, the break of which may extend the slide towards the 2732 area, near the lows of Monday and Tuesday.

US S&P 500 4-hour chart technical analysis

Will the ECB Push Back its Forward Guidance?

Today, all lights are likely to fall on the ECB monetary policy meeting. Apart from the decision, the statement, and the conference by President Draghi, we will also get new macroeconomic projections. At their latest gathering, officials reiterated that interest rates are likely to remain at present levels “at least through the end of 2019”, while at the conference, Draghi noted that the risks to the Euro area outlook “remain tilted to the downside”. He also added that policymakers will consider “whether the preservation of the favorable implications of negative interest rates for the economy requires the mitigation of their possible side effects, if any, on bank intermediation”.

ECB interest rates

Since then, GDP data showed that the bloc’s economy accelerated to +0.4% qoq in Q1 from +0.2% in the last three months of 2018, but this kept the yoy rate unchanged at 1.2%, the lowest since Q1 2015. Data with regards to the current quarter did not paint a brighter picture either. PMIs for April disappointed and although May’s final prints showed a minor improvement in the services and composite index, in the report it was noted that the “data are merely indicating a +0.2% rise in GDP in the second quarter.” As for inflation, preliminary data showed that it slowed more than expected last month, in both headline and core terms. Specifically, headline CPI slowed to +1.2% yoy from +1.7%, while the core rate fell to +0.8% yoy from +1.3%. What’s more, last week, Governing Council member Olli Rehn said that the first increase in interest rates is now further away than it was a few months ago, adding that officials will discuss further policy options at this meeting.

Eurozone PMIs vs GDP

All this, combined with the latest escalation in tensions between China and the US, suggests that there is a decent chance for the ECB to push further back the timing of when it expects interest rates to start rising, and perhaps hint at additional policy measures, beyond the new round of TLTROs, which is set to begin in September. Perhaps, officials could discuss the introduction of a tiered deposit rate, which was already rumored ahead of the prior meeting. We could also get the details of the new round of TLTROs. The prior round was priced at the Bank’s deposit rate of -0.4%, but, according to some officials, the terms of the new package could be less generous. With regards to the economic projections, bearing in mind the further softness in Euro area data, we see the case for downside revisions, especially in inflation.

Net net, economic releases since the prior meeting, as well as the new trade tensions, suggest that the ECB may appear even more dovish this time, which could bring the euro under selling interest. However, we would avoid exploiting any euro weakness against the US dollar. Although the US currency strengthened yesterday, it has turned sensitive to Fed cut expectations recently, and thus, we cannot rule out another round of USD-selling if more Fed officials enter the chorus of those willing to push the hiking button in order to prevent a sharp economic slowdown. We would instead prefer Kiwi, which continues to perform well in the aftermath of comments by RBNZ Assistant Governor Hawkesby that his Bank could keep rates unchanged in the foreseeable future. Now, in case the ECB decides not to push back its forward guidance, and officials refrain from discussing additional policy tools, the euro could rally.

EUR/NZD – Technical Outlook

EUR/NZD traded lower yesterday, after it hit resistance slightly above the 1.6980 level. That said the slide was stopped near the 1.6927 barrier, and then, the rate rebounded somewhat. The currency pair has been printing lower highs and lower lows since May 23rd, while the dip below the 1.7035 zone completed a bearish trend reversal in our view. Thus, we hold the view that the near-term outlook is negative for now.

If the bears are willing to take charge again soon , we would expect them to aim for another test near the 1.6927 level, the break of which may open the way towards the 1.6898 support, marked by the low of May 7th, or the 1.6880 obstacle, defined by the low of the day before. Nonetheless, before the next negative leg, we see the case for the current corrective bounce to continue for a while more, perhaps to challenge again the 1.6980 zone.

The case for some more recovery, before the bears decide to shoot again, is also supported by our short-term momentum studies. The RSI ticked up after hitting support near its 30 line, while the MACD, although below both its zero and trigger lines, shows signs that it could start bottoming soon.

In order to start examining a larger recovery though, beyond 1.6980, we would like to see a decisive break above the psychological area of 1.7000. Such a move may initially pave the way towards the 1.7035 zone, the break of which could trigger extensions towards the crossroads of the 1.7100 barrier and the downside resistance line drawn from the high of May 23rd.

EUR/NZD 4-hour chart technical analysis

As for the Rest of Today’s Events

Besides the ECB policy meeting, we also have some economic data coming out today. Eurozone’s final GDP for Q1 and the bloc’s employment change for the quarter are scheduled to be released. The final growth print is expected to confirm the second estimate, while the employment change is anticipated to show the same quarterly pace of job gains as the previous one. Later in the day, the US trade deficit is anticipated to have narrowed somewhat, while the Unit Labor Costs index for Q1 is expected to have fallen at the same pace as in Q4 2018. We get April trade data from Canada as well, alongside the nation’s Ivey PMI for May.

With regards to the speakers, apart from ECB President Draghi, we will get to hear from Dallas Fed President Robert Kaplan and New York Fed President John Williams.

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