Draghi: ECB to be Patient with the Timing of the First Rate Increase
The euro ended the day mixed against its G10 peers yesterday. It gained against SEK, NOK and GBP in that order, while it underperformed against USD, AUD, JPY and CHF. The common currency traded virtually unchanged against NZD and CAD.
On Tuesday, during the European morning, EUR/USD came under selling interest following ECB President Draghi’s remarks at the “ECB Forum of Central Banking” in Sintra, Portugal. The President noted that the ECB will remain patient in determining the timing of the first rate increase and will take a gradual approach to adjusting policy thereafter. He also added that the money-market implied rate path broadly reflects the ECB’s intentions.
In our view, his comment that the money-market rate path reflects the ECB’s intentions confirms investors choice to push back their hike expectations following the latest ECB meeting, and supports the case that interest rates are likely to start rinsing in September 2019 the earliest. What’s more, the “gradual approach thereafter” makes us believe that after the first hike, there may be a pause before deciding on the next one.
Combining the ECB’s gradual approach with a Fed set to end 2018 with a total of 4 rate hikes, and to continue with 3 more in 2019, we would expect EUR/USD to stay under selling interest in the foreseeable future.
Today, ECB President Draghi, Fed Chair Powell, BoJ Governor Kuroda and RBA Governor Lowe are scheduled to participate in a panel discussion, which could highlight the differences in monetary policy between the four central banks.
EUR/USD – Technical Outlook
Looking at the daily chart, EUR/USD continues to tease the long-term upwards moving trendline taken from the low of 3rd of January last year. The trendline is acting as a very good support for now, but bearing in mind the latest drop, we are cautious that the pair the pair could eventually break it to the downside, which would be a sign of a change in the long-term trend. But until that break happened, there is still a chance bounce back to the upside. Although the fundamentals suggest to us that this pair could continue drifting lower in the near term, we would stand flat from a technical standpoint and wait for a break below the long-term trend line before we get more confident on the downside.
A clear break and a close on the day below the aforementioned long-term trendline could mean that more bears are joining the game. Another good confirmation of a potential continuation to the downside would be a break and a close below the 1.1510 level, marked by the lowest point of May, which could initially aim for the 1.1450 barrier. Another dip below that level could carry more bearish implications and could set the stage for the 1.1300 zone.
On the upside, if the aforementioned trendline holds and we see a bounce from it, then keep a close eye on the 1.1650 area, which was near yesterday’s highs. A break of that area could give some hope for the bulls that EUR/USD could be recovering. Certainly, the pair would need to make another run towards the 1.1725 level, which if broken, could be seen as a positive and more bulls could start joining in and that could lead to a test of the 1.1850 zone.
EU Withdrawal Bill Returns to the House of Commons
The pound traded lower against all but two of the other G10 currencies on Tuesday. It gained only against SEK, while it traded virtually unchanged against NOK. The British currency underperformed the most against USD, AUD, and JPY in that order.
With no major economic indicators coming out of the UK today, just a day ahead of the BoE policy meeting, pound-traders are likely to fix their gaze on UK politics. Remember that last week PM Theresa May won a vote in the House of Commons over amendments to the EU withdrawal bill, including the meaningful vote, with a compromise on plans to give lawmakers “input” into what the government would do in a no-deal scenario.
However, just the next day, pro-EU rebels within the Conservative Party argued over the shape of a possible compromise, and when the plan returned to the House of Lords on Monday, it was rejected. The bill is now passed back to the House of Commons, where MPs will have to decide today whether they agree with the Lords or with the government. With no majority in the parliament’s lower chamber, it only takes a few Conservatives to oppose May’s proposal for her to lose. However, one Tory rebel, Dominic Grieve, said that he is hopeful the government will listen to what has come back from the Lords, and that they may be able to achieve a “sensible compromise” this time.
In our view, all this back and forth between the two chambers, also known as “Parliamentary ping-pong”, increases questions over Theresa May’s ability to lead a minority government and raises concerns over more delays in talks with the EU. Even if the parliament eventually agrees with the government on the Brexit bill, the bill would still have to be accepted by the EU.
We believe that the dispute in the UK’s political landscape is likely to keep the pound under selling interest and if continues, it could weigh on the BoE’s future policy plans as well. Tomorrow, the Bank meets to decide on interest rates and it is widely anticipated to keep its policy untouched. However, investors will be on the lookout for hints as to whether policymakers are willing to push the hiking button in the coming months, perhaps as early as August.
GBP/JPY – Technical Outlook
GBP/JPY is currently experiencing a downslide, due to the weakening of the British Pound and the tensions on the geopolitical arena, where investors are seeing interest in the yen as a safe-haven currency. On the bigger picture, the pair continues to trade below the long-term upwards moving trendline, drawn from the lows of the 17th of April last year.
For now, the trend is still to the downside, but along the way lower, GBP/JPY could see some moments of correction back to the upside, before it moves back down again. A break below yesterday’s lows at around 144.35 could be a good entry point for more bulls to join in and drive the pair towards the 143.15 level, marked near the lowest point in May. If that level will not be able to withhold the rate from dropping further, this opens the doors for a potential move towards the 141.20 zone, which was the lowest point in September last year. Certainly, GBP/JPY could recover some of its lost grounds and test the 145.30 area or even the 146.10 zone again, this time from underneath, and then move back down towards the previously mentioned levels.
Alternatively, a good strong break of the 146.10 level could spike the interest of some bulls, who could interpret this move as a positive sign and drive the pair to the 147.05 level and then to the 148.10 mark. The last one is not far from the aforementioned upwards moving trendline, which could end up being tested again.
As for the Rest of Today’s Events
From the US, we get current account data for Q1 and existing home sales for May.
Tonight, during the Asian morning Thursday, New Zealand’s GDP data for Q1 are coming out. Expectations are for the quarterly rate to have ticked down to +0.5% qoq from +0.6%, which is likely to drive the yearly rate down to +2.7% yoy from +2.9%.
With not much on the economic calendar today, we expect market participants to also keep an eye on the subject of trade. Any headlines suggesting that the row between China and the US worsens further could serve another round of risk aversion in the financial world.
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