Since the beginning of the year, investors have been consistently selling euros and jumped on every rally to drive the currency lower. As we head into this month's European Central Bank monetary policy meeting, EUR/USD is rebounding on the back of profit taking as some market participants hope that the central bank will recognize the recent improvements in service sector activity and retail sales. However the ECB has 6 primary concerns - none of which saw meaningful progress over the past month. The US is back with threats of fresh tariffs on the European Union. In addition to auto tariffs, they are now saying that cheese and wine could be penalized as well in a package that could include as much as $11B worth of tariffs. Brussels said they are prepared to respond with their own retaliatory tariffs and this tit for tat isn't good for the currency. At the same time, Italy is at the cusp of recession due to weaker growth in Germany and Europe. There's been no real progress in US-China trade or Brexit negotiations - both of which are serious threats to the Eurozone and global economy. Inflation is moving lower despite the recovery in oil prices and lower euro.
6 Things that Keeps ECB Awake at Night
- Auto Tariffs
- Italy at the Cusp of Recession
- Brexit
- US-China Trade Talks
- Protectionism / Global Growth
- Low Inflation
So while there's a small chance the ECB could help the euro by talking about possible stabilization in data, there's still a lot for the central bank to be worried about. When they last met, Mario Draghi sent the euro tumbling by expressing these concerns - we don't expect the same move because there's a short term positive bias in the euro. If Draghi focuses on the negative, EUR/USD will fall, but the 1.1176 March low could still hold, at least on Wednesday. However if there's even a hint of optimism, EUR/USD could squeeze up to 1.1350. We still believe that the risk is to the downside and with German 10 year yields in negative territory, EUR/USD should be trading closer to 1.10.
Here's a look at how the Eurozone economy changed since the last ECB meeting.
Sterling will also be in focus on Wednesday with the European Council meeting to discuss Britain's request to delay their exit until June 30th. Prime Minister May failed to secure any commitments during her visit to Berlin and Paris before the meeting but according to various reports, there are no specific objections to their request. At the same time, the EU's Barnier made it clear that the withdrawal agreement is not up for renegotiation, Labour said the government hasn't moved on its position with the custom union so the only option is for Parliament to approve the current deal. May argues that support is growing but we'll only know for sure when its voted on again. The fact that GBP/USD is still trading above 1.30 means that investors assume an extension will be granted.
Meanwhile, the US dollar traded lower against most of the major currencies with USD/JPY dropping below 111 intraday. A large part of that had to do with risk aversion because there was on US data on the calendar. We also talked about how Friday's non-farm payrolls report was far from impressive which reinforces the Fed's case to leave interest rates unchanged for the rest of the year. Tomorrow should be an interesting day for the greenback, with CPI and FOMC minutes scheduled for release. Price pressures should be stronger given the uptick in oil and gas prices but given the central bank's forecast changes, the FOMC minutes should be dovish.