- ECB President Draghi should announce today that current monetary policy remains unchanged. However, we believe that the lack of inflation will certainly push him to announce that further easing is at least possible
- Worryingly, the European inflation outlook seems even weaker than at December’s meeting. There is a good chance that ECB’s inflation expectations for 2017 will be lowered
- Disappointing figures on preliminary Q4 Eurozone GDP next week will pave the way for more stimulus at the next meeting in March
- Given the huge amount of short positions, the relief will be only temporary and we expect crude oil prices to test new lows
- EUR/USD on the medium-term may remain in its uptrend channel and will try, for the third time since the beginning of the year, to break the 1.10 resistance to the upside
- The weakness of the Canadian dollar will remain of great help in supporting the competitiveness of its exports
- Pound sterling is taking a breather as traders digest the latest speech from Governor Carney
- GBP/USD is treading water between 1.4125 and 1.4220
- EUR/GBP may go further up with a resistance to be found at 0.7874
Crude oil showed no sign of recovery during the US session yesterday as WTI fell to below $27 a barrel, testing lows from May 2003. However, in Asia the price bounced back and consolidated above the $28 threshold. Given the huge amount of short positions, relief will be only temporary and we expect crude oil prices to test new lows.
Yesterday the inflation report from the US was a disappointment as expected (our Daily Market Brief from yesterday). Headline CPI printed at -0.1%m/m in December, below estimates and the previous month reading of 0.0%. While the core measure, which excludes food and energy, came in at 0.1%m/m versus 0.2% expected and previous read. However, in spite of these poor numbers, the US dollar held its ground as market participants stay focused on crude oil putting the entire US inflation/rate hike story on the backburner. EUR/USD paired gains in Tokyo and is currently trading at 1.0915 dollar for 1 euro. On the medium-term, the pair remains in its uptrend channel and will try, for the third time since the beginning of the year, to break the 1.10 resistance to the upside.
***Yann Quelenn, market analyst: “There is not much to expect from the EBC meeting later today. President Draghi should announce that current monetary policy remains unchanged since the last deposit rate cut in December from -0.2% to -0.3%. For the time being, we believe that the lack of inflation will certainly push Draghi to announce that further easing is however possible. Indeed, as we know inflation has not picked up since the beginning of the QE programme last year. Worryingly, the outlook appears even weaker than it did at December’s meeting. Global turmoil, particularly lingering low crude oil prices will keep pressure on the Eurozone CPI. Consequently there is a good chance that the ECB’s inflation expectations for 2017 will be lowered. According to us, it will certainly be 1%.
Last but not least, Draghi is taking a very measured approach to stimulus out of concern for the central bank’s credibility. History has taught us that both QEs in Japan and in the US have proven to be less than 100% efficient. In any case, we feel that policymakers are currently waiting to collect more data, especially preliminary Q4 Eurozone GDP which will be released next week. Disappointing figures will pave the way for more stimulus at the next meeting in March. For the moment the EURUSD should not move much on today’s meeting.”***
On Wednesday, the Canadian central bank decided to maintain its key interest rate at 0.50% and delivered an upbeat message about global growth. Governor Poloz and his colleagues believe that the planned increase in federal infrastructure spending and a global recovery make a rate cut unnecessary for now. Moreover, the weakness of the Canadian dollar will remain of great help in supporting competitiveness of its exports. USD/CAD tested 1.4690 in the London session before easing around 1.45 in Asia.
In the equity market, sellers have not yet grown tired as they continue to push Asian shares deeper into negative territory. The Japanese Nikkei fell 2.43% and reached 16,017, the lowest level since October 2014. In Hong Kong, the Hang Seng fell 1.67%, while in Mainland China both the Shanghai and Shenzhen Composite plummeted more than 3%. Elsewhere, the STI was down 1.06%, in South Korea the Kospi edged down 0.27% while in Taiwan shares fell 0.46%.
After a tough start to the week, the pound sterling is taking a breather as traders digest the latest speech from Governor Carney. GBP/USD is treading water between 1.4125 and 1.4220. EUR/GBP is also consolidating earlier gains at around 0.7685. On the upside, a resistance can be found at 0.7874 (high from January last year), while on the downside an hourly support lies at 0.7313 (low from January 5th). The bias remains on the upside.
Today traders will be watching ECB rate decision; gold and forex reserve from Russia; Philadelphia Fed business outlook and initial jobless claims from the US; consumer confidence index from Germany