Wednesday, May 22, 2019

Draghi's speech, UK inflation data and FOMC minutes comprise a busy calendar today

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks
  • Oil

MORNING BRIEFING

All three major currencies will be in play today ahead of a host of key data reports and policymakers' speeches. The Euro, the Pound and the Dollar should see more meaningful price action during the session ahead with ECB's Draghi speaking in Frankfurt, the UK's inflation figures on the docket and the FOMC minutes' release late in the evening. Yesterday's price action was pretty much subdued with the exception of a sudden rally and reversal on the European majors when news broke out that Theresa May promised her MPs a chance to vote for a second referendum. Equities were positive across the board, Gold moved to downside followed by Oil.

Starting with Sterling, the British currency spiked higher for a brief period of time yesterday when a news report suggested that PM May offered Parliament a chance to vote in favor for a second Brexit referendum - but only after they approve her current deal. Albeit, her proposal was met with opposition from MPs both in favor and against Brexit and it seems that her days as Prime Minister are numbered. The Pound will remain front and center today though in light of the release of the CPI figures, which may provide some insight on whether the BoE could raise interest rates after this whole Brexit saga is done.

Economists are predicting that prices rose during the past month, bringing the yearly inflation reading at 2.2%, which is higher to the 2% target that the BoE holds. However, we still fear that the risk for the Pound lies to the downside. If the report does come in positive, as predicted, normally Sterling would rally given that the odds for a BoE rate hike would increase. Amid the Brexit-related uncertainty though and the potential repercussions of a no-deal exit the British central bank wouldn't be considering any moves soon so any optimism from the Sterling bulls would be very limited, capping any potential upside. On the other hand, if the CPI figures print softer than expected, then the Pound would come under more pressure and the 1.27 mark could give way pretty quickly driving prices to the 1.2650 area.

The Euro joined the Pound on its brief rally higher but quickly reversed and settled around 1.1150. Mario Draghi's speech in Frankfurt today may provide further clues on how serious the ECB is at this stage in regards to providing fresh stimulus to the fragile Euro area economy. There's quite a lot of speculation around the central bank's TLTRO program, due to be announced next month; as such, if Draghi sounds more cautious than usual, the odds of more easing coming our way will send the Euro further to the downside, with the 1.11 mark the next stop.

Meanwhile, the FOMC minutes' release from this month's Fed meeting could prove to be the most important event of the day - or just a dud. The US central bank should be monitoring the slowdown in several parts of the US economy combined with the ongoing trade tensions and the question is how worried they might be. Any clues on whether the US policymakers have begun considering a rate cut as a means to support the domestic economy as it enters its late cycle stage will weigh down on the greenback. On the flip side, if the minutes reveal bullish consensus among the committee the Dollar will continue surging.

Gold edged a bit lower but still remained around the $1,275 level which we highlighted as an important medium-term support level in our note yesterday. The yellow metal's reaction from this area will be interesting, given that a further decline - an a potential move below the $1,267 mark - will signal that bears are still in control and selling pressure could drive Gold to the $1,250 area. Keep a close eye on the FOMC minutes' release as Gold's price action currently hinges on how the Dollar will perform post-release. Elsewhere, Oil lost the $63 handle overnight and now it's key to see whether prices will quickly bounce higher; if they don't, then a deeper correction towards $60.50 seems likely.

Finally, equities closed in positive territory yesterday with Europe and the US notching between 0.5% to 1% gains. The bearish bias on the back of the trade dispute re-escalation seems to have taken a back seat for now and investors will be keen to see what the Fed has to say in regards to the domestic economy's health. A positive bias among the US policymakers would be well received by stock investors while a cautious tone - pointing towards rate cuts - could also be considered a boon. As such, barring a surprising ultra-bearish message coming out of the FOMC minutes, equities should be poised for more gains in the near term.

MARKET EVENTS TO WATCH

  • ECB's President Mario Draghi speaks in Frankfurt - 11.30am
  • UK Consumer Price Index - 12.30pm
  • DOE U.S. Crude Oil Inventories - 6.30pm
  • FOMC Meeting Minutes - 10pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research