FX Awaits the Draghi and Trump Show

Market Drivers March 8, 2018
FX essentially unmoved
All eyes nn ECB
Nikkei 0.54% Dax -0.37%
Oil $61/bbl
Gold $1327/oz.
Bitcoin $9962

Europe and Asia:
AUD AU Trade 1.06B vs. .21B
CNY Trade 225B vs. -70B

North America:
EUR ECB 8:30
USD Weekly Jobless 8:30

It’s been a very quiet night of trade in the FX market with most of the majors contained to tight 30 point ranges during Asian and early European trade.

The dollar firmed up against every G-11 pair although the move has been minuscule and currency markets appear to be treading water ahead of the North American open awaiting the two key event risk events of the day.

In North America today the ECB will hold its monthly presser at 13:30 GMT and traders will parsing Mr. Draghi’s words very carefully for any change in language. If Mr. Draghi emphasizes the recent uptick in growth and ignores the political factors brought on by the chaotic Italian election that could put a Eurosceptic party at the helm, the market will view the meeting as hawkish. Such posture would suggest that the ECB is preparing the market for a QE taper having judged the EZ economy sound enough to begin removing accommodation.

It’s unprecedented for ECB to comment on politics, so Mr. Draghi will do the utmost to avoid any remarks on the Italian election. However, if the economic assessment is downgraded and if the balance of risks is moved from balanced to negative, the market is likely to react with a heavy selloff in the EURUSD.

In short, a sanguine tone from ECB could put the bid in the pair with bulls trying to run it towards the 1.2500 figure, while a much more cautious message could easily see EURenact USD break the 1.2300 level before the end of the day.

After the ECB, attention will turn to Washington DC where the Trump administration is expected to enact fresh trade tariffs on steel and aluminum at 20:30 GMT. Ahead of the release Administration officials attempted to soften the news by stating that Mexico and Canada would be temporarily exempt from new duties, but even so the Americans will almost certainly be sued in WTO on violation of free trade agreements.

The true impact of the move will be political rather economic. Will Europeans and Chinese respond in kind? Will that set off a vicious cycle of retaliatory measures? For now, the tariff story has been a tempest in a teapot, but it could very quickly grow into an ugly storm that could trigger massive risk aversion flows not only in FX but other asset classes as well.