Tuesday was a “risk off” day, with major global equity indices trading in the red, perhaps due to Trump’s threat to impose tariffs on EU goods, as well as the downgrade in the IMF’s global growth projections. As for today, the spotlight is likely to turn to the EU summit dedicated on Brexit, with investors awaiting whether the EU will grant the UK another extension. We also have an ECB meeting on the agenda, where we expect Draghi and co. to reiterate that the risks surrounding the Euro area outlook remain to the downside.
The dollar traded higher against most of the other G10 currencies on Tuesday. It gained the most against NOK, CAD and CHF, while it underperformed against JPY, and slightly versus NZD. The currencies against which the greenback was found virtually unchanged were AUD and SEK.
Although not so clear by the performance in the FX sphere, the strengthening of the yen and the performance of the equity market suggest a risk-off trading activity. Major EU and US indices were a sea of red yesterday, while during the Asian session Wednesday, Japan’s Nikkei closed 0.53% down, while China’s Shanghai Composite was nearly unchanged (+0.06%).
The catalysts behind the negative investor morale may have been US President Trump’s threat to impose tariffs on USD 11bn worth of EU goods, as well as the downgrade in the IMF’s global growth projections. Trump’s threat comes at a time when the US is trying to finalize a trade accord with China, and suggests that even if this happens, the trade war may not end. The US may just choose a different “opponent”.
As for our view, judging by the response of the equity markets to the “further progress” headlines with regards the US-China talks, we believe that a final accord between those two nations may be already priced in to a large extent. Thus, we don’t expect any major equity rally in case it takes flesh. We believe that investors will pay more attention to the US-EU conflict, which if escalates, could undermine their risk appetite. That said, we don’t expect a notable bearish reversal either, maybe a correction to the latest rally. The US-China saga suggests that Trump is using tariffs as a negotiating tool in order to gain the upper hand in future talks and get the most of what he wants. Thus, even if a new war is on the cards, anything suggesting that this could lead to US-EU negotiations may keep any equity slide in check.
Passing the ball to Brexit, today is the emergency EU summit dedicated to Brexit, and investors will be eager to find out whether the EU will grant the UK a second extension of the Article 50. According to a draft statement, EU leaders are likely to approve another delay, but it would have to be longer than what May requested (until June 30th) and would require the UK to participate in the EU Parliament elections. If the UK fails to obey, the EU would kick the UK out, even with no accord. There was no end date specified in the draft, but market chatter suggests that it could be until the end of the year or until March 2020. The UK would still be able to exit much sooner if the Brexit deal can secure majority in Parliament. Even French President Macron appears willing to allow another extension, but not beyond December and conditional upon compliance checks on the UK every three months.
As for the pound, it strengthened yesterday following reports that German Chancellor Merkel said to be willing to put a five-year limit on the Irish backstop, but it was quick to erase those gains after Germany denied the rumors. As for today, sterling could gain if another extension is granted, but not much. Following the draft document, the market may be already prepared for that to happen, and thus it would not come as a surprise. The currency could slide somewhat in case the extension is not as long as rumored, but the outcome that could send the pound off the cliff is a rejection. With what we have in hand at the moment, this appears to be the least likely scenario, but we cannot take it totally off the table. Remember that veto from a single EU member-state is enough to kill any extension and spark fresh fears of a no-deal Brexit this Friday.
Looking at GBP/USD’s 4-hour chart, we can see that the pair is stuck between two lines: a short-term downside one, running from the peak of March 13th, and the upside one, which is taken from the low of March 10th. In other words, GBP/USD seems to be coiling up within a triangle formation. From the very short-term perspective, our oscillators started pointing higher again, which means that we could see the rate moving a bit more to the north. But the upside could be limited due to the above-mentioned short-term downside line. If that line continues to hold the bulls down, the bears might eventually take control and drag the pair back down again.
If GBP/USD breaks above the 1.3090 barrier, this is when we will aim for the 1.3120 obstacle, or even the previously-discussed downside line. If the pair fails to move above it, the bears could quickly pick up on that and send the rate sliding back down again, towards the above-mentioned levels. A strong selling activity could bring GBP/USD even further down, potentially aiming for the 1.3030 hurdle, marked by yesterday’s low, or even the aforementioned short-term upside line for a quick test.
On the other hand, in order to shift our view more to the upside in the near term, we would like to see a break of the previously-mentioned downside line and a strong push above the 1.3190 barrier, marked by the high of April 4th. In such a case, the pair could have a good chance to continue drifting further north, where the next potential target might be near the high of March 27th, at 1.3265, a break of which could invite even more buyers into the game. This could open the door to the very important 1.3300 level, which held the rate down around mid-March.
Apart from the EU summit on Brexit, we have another event that will most likely keep investors busy today: the ECB monetary policy meeting. At their last gathering, ECB officials pushed back their interest-rate forward guidance, noting that rates are likely to remain at current levels “at least through the end of 2019”, instead of “at least through the summer of 2019”, which was the case before. They also officially announced that they will launch a new series of TLTROs starting in September and ending in March 2021, while at the press conference following the decision, ECB President Mario Draghi reiterated that the risks surrounding the bloc’s growth outlook are “still tilted to the downside”, even after the aforementioned policy moves and even after the Bank slashed both its GDP and inflation projections.
Since then, Eurozone data continued to disappoint, with the bloc’s manufacturing PMI for March sliding further into the contractionary territory and hitting its lowest since January 2013. This pulled the composite index back down to 51.3 from 51.9. With regards to inflation, the headline CPI slowed to +1.4% yoy from +1.5%, but most importantly, the core rate slid to +0.8% yoy from +1.0%. All this suggest that the Bank will continue assessing the risks surrounding the Euro area economic outlook as being tilted to the downside, while recent comments by President Draghi that policymakers could delay a rate hike even further if needed, could keep investors on the edge of their seats in anticipation on whether another push-back in the rate guidance could materialize at this meeting.
As for our view, we believe that Draghi and co. will refrain from proceeding with such a change at this gathering. After all, they changed the guidance just last month. We believe that officials may prefer to wait for a while more, and perhaps assess whether they should delay raising rates further at the June gathering, when they will have the new staff macroeconomic projections in hand. Although our base-case scenario is still dovish, we don’t expect the euro to tumble. It did so last month when officials proceeded with the aforementioned changes and thus, a reiteration is unlikely prove harmful. It could even prove somewhat positive if we take into account that there may be some speculation of another push-back in the Bank’s rate-guidance. For the common currency to tumble, we believe that an even more dovish stance is needed.
On Monday, EUR/USD finally managed to break above the 1.1255 barrier, which kept holding rate down between March 29th and April 5th. Then, the pair travelled a bit higher, tested its 200 EMA on the 4-hour chart and retraced back down. EUR/USD tested the 1.1255 level again, which now took the role of an important support zone and continues to trade above it. Given that today we have the ECB rate decision and Mario Draghi’s press conference afterwards, we may see some increased volatility and some erratic moves from the pair. For now, looking at the current picture, we remain somewhat bullish in the short run.
If the rate accelerates again and travels above the 1.1285 barrier, this would also place the pair above its 200 EMA, which could be seen as a positive. This is when more bulls could start joining in again, as it may increase the chances for EUR/USD to move further north. The next potential target might be the 1.1330 obstacle, a break of which might make the bulls even more confident and allow them to push the rate to the 1.1390 level, marked by the high of March 22nd.
Alternatively, in order to aim for some lower areas, at least in the short run, we would like to see a rate-drop below the 1.1255 level and also the short-term tentative upside support line taken from the low of April 2nd. If such a move occurs, the pair might slide further towards the 1.1210 hurdle, which if fails to withhold the rate-depreciation, may force EUR/USD to fall even more. That’s when the support zone between the 1.1175 and 1.1185 levels might come into play. Those levels are marked by the lows of March 7th and April 2nd respectively.
From the UK, we get the industrial and manufacturing production, the trade balance, and the monthly GDP, all for February. However, bearing in mind that GBP-traders will most probably have their gaze locked on the Brexit sequel and the EU summit, we expect these data releases to pass unnoticed.
Later in the day, the US CPIs are coming out. The headline rate is expected to have rebounded to +1.8% yoy from +1.5%, but the core one is anticipated to have stayed unchanged at +2.1% yoy. At its latest meeting, the FOMC downgraded its rate path projections, scraping from its “dot plot” the 2 previously-suggested rate hikes for 2019. Officials also noted that the economic activity has slowed from its solid rate in Q4 2018, prompting market participants to turn even more pessimistic with regards to the Committee’s future actions. According to the Fed funds futures, investors currently see only a 47% chance for no action this year, while there is a 53% probability for interest rates to be lower. Having that in mind, we doubt that a rebound in the headline CPI rate, still below the Fed’s target, would be enough to revive hike bets, especially with the core CPI staying unchanged just a tick above 2%. In our view, decent results could just allow investors to take some of their cut bets off the table.
We also get the minutes from the latest FOMC meeting, but bearing in mind that apart from the meeting statement, we also got updated economic projections, a new “dot plot”, and a press conference by Chair Powell, we believe that there is little new information we can get from the minutes.
With regards to the energy market, we have the EIA (Energy Information Administration) weekly report on crude oil inventories. The forecast points to a 1.3mn barrels slide following a decline of nearly 2mn. That said, bearing in mind that the API report, released yesterday, revealed a 4.1mn barrels increase, we view the risks surrounding the EIA forecast as tilted to the upside.
As for tonight, during the Asian morning Thursday, China’s CPI and PPI for March are scheduled to be released. The CPI rate is expected to have risen to +2.4% yoy from +1.5%, while the PPI is forecast to have accelerated to +0.4% yoy from +0.1%.
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