Wednesday, April 10, 2019

Will the ECB put the Euro under pressure while Theresa May goes to Brussels for Brexit endgame?

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

MORNING BRIEFING

Central bank policies and fresh US figures take center stage today ahead of the ECB meeting and the release of the FOMC minutes from last month. The US CPI inflation report will be closely watched as Dollar bulls are hoping for a positive printing that will reinvigorate support for the greenback, albeit a miss will hurt badly. Theresa May is going to Brussels where the European Council is expected to approve her recent extension request, but probably not grant her the terms she favors, putting her political future in jeopardy. Equities declined, Gold saw more gains and Oil is taking a breather.

The Euro comes front and center today ahead of the ECB meeting on monetary policy and Mario Draghi's press conference that will follow. The European Central Bank will undoubtedly leave interest rates unchanged but what is more important - and will dictate the price action for the shared currency - is what Mario Draghi has to say about growth in the Eurozone and his potential plans to stimulate it. Truth be told, there has been some improvement in the region's figures, primarily in the Services' sector but there are still a lot of headwinds that are casting doubts over the Euro's medium-term outlook.

The host of geopolitical and macroeconomic concerns for the ECB includes issues like Brexit, the US-China trade war, Italy being on the brink of recession and the low inflation environment in the Euro area. Adding to these, US President Donald Trump threatened the area with tariffs on auto imports, with the EU's side ready to retaliate if necessary. So, even though Draghi might have a couple of positive things to focus on, there are also a lot of risks on the horizon. As such, the short-term price action for the Euro depends on what the head of the ECB will decide to focus on: if he offers a positive outlook, with no references to any monetary easing required, the Euro will continue its rally towards 1.13 and 1.1330; otherwise, a cautious Draghi that will discuss the need for fresh quantitative easing will send prices towards 1.12 and below.

The Pound will also be in focus today with the European Council scheduled to meet in order to approve or reject Britain's extension request. Theresa May will appear in Brussels empty-handed as her meetings in Berlin and Paris produced no concrete progress while her attempt to get the Labor party to join the Brexit effort was proven fruitless. The latest news suggests that the EU is not prepared to offer May the short extension that she wants and instead they prefer a long delay - potentially up to 1 year - in order to avoid a series of last-minute debates and emergency sessions.

This is not what May wants in any way possible, as her whole political rhetoric has been based on the premise that the British people voted in favor of Brexit and that her government will indeed deliver Brexit in time. This has not been the case until now and if a 1-year extension is agreed upon, it may seal Theresa May's political fate, as the internal opposition will have the opportunity to oust her without risking a no-deal exit due to the lack of negotiating time. In any case, if the extension is granted, the Pound will rally towards 1.32 and depending on what happens with May's future we may actually see further gains in the medium term.

In regards to the Dollar, the US currency will take a backseat today in light of the key ECB and Brexit events but the calendar also includes a couple of important reports from the States. The release of the CPI inflation reading will be keenly watched by Dollar traders, especially after a series of disappointing US data: expectations are set for a positive release that may slow down the greenback's decline but if the figures miss again, the Dollar will sell off further - and in a hurry. Dollar/Yen sits just above the 111 mark and more losses will see prices travelling to 110.50 and below. The FOMC minutes are also scheduled for release today but we wouldn't expect any further surprises from the US central bank, knowing that they have already turned dovish in recent weeks, which has been well-communicated.

Gold sees continued gains as the Dollar is retreating and with Treasury yields now dropping to fresh lows, the case for the yellow metal to move higher remains relevant. Prices have overtaken the $1,305 mark yesterday but the lack of any important resistance levels between $1,300 and $1,310 suggests that more upside is possible. This will largely depend on the release of the US CPI inflation report today, where a bearish reading will push Gold higher while a robust set of figures will put the $1,300 support under pressure. Oil almost made it to $65 where a strong resistance is found; we still think that on balance prices may see a correction with the $63 the key support area.

Equities lost ground yesterday closing in the red around the globe, with Europe and the US ending the session with a 0.6% decline on average. Asia is tracking the US lower this morning and futures on both sides of the pond are pointing towards a muted opening bell. The US earnings season is just around the corner and, with the US indices close to their recent all-time highs, corporate profitability - or lack thereof - will be the next catalyst. The fundamental environment is still positive but with the fiscal boon of last year's tax cuts now pretty much gone, corporate margins are again being put to the test.

MARKET EVENTS TO WATCH

  • UK Manufacturing Production - 12.30pm
  • UK Industrial Production - 12.30pm
  • European Central Bank Rate Decision - 3.45pm
  • ECB's Draghi Speaks in Frankfurt After Policy Decision - 4.30pm
  • US Consumer Price Index - 4.30pm
  • FOMC Meeting Minutes - 10pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research