ECB meeting unlikely to be a FX gamechanger

KBC Market Research Desk KBC Bank

The EUR/USD trading pattern yesterday was similar to what happened of late. The news headlines caused some moderate intraday swings but wasn’t able to push the pair out of the established ranges. Early euro softness reversed on headlines that Italy might agree a 2% 2019 budget deficit. Easing tensions in the trade talks between the US and China and a positive risk sentiment were rather neutral for EUR/USD trading. US CPI data were exactly in line with expectations. The euro was also little affected by the Brexit saga (drama) as it developed in the UK yesterday afternoon. EUR/USD closed a rather dull session at 1.1369 (from 1.1317). Trading in the USD/JPY cross rate was even less inspiring. A risk-on sentiment and higher US yields failed to inspire any further USD/JPY gains. The pair finished at 113.29 (from 113.38). Overnight, Asian equities join the risk rebound from the US yesterday. The dollar shows no clear directional bias. The yuan continues a cautious rebound (USD/CNY 6.8650). EUR/USD trades little changed (1.1370). USD/JPY gains a few ticks (113.45). US data (import prices and claims) later today are second tier. The focus will be on the ECB meeting. Chairman Draghi has to walk a thin line. He will probably admit risks to growth, but the new ECB-forecasts will stay strong enough for Draghi to conclude that inflation will move closer to target at the end of the policy horizon. Question is whether the market will believe this rather positive scenario. The ECB communication might help to put a floor for European yields. This is a tentative euro positive, but we don’t expect today’s meeting to be a game-changer for EUR/USD. The focus will soon turn to next week’s Fed meeting. Of late, the 1.1450/1.15 area proved to be a though resistance. We don’t see a trigger for a break ST.

Sterling trading was at the mercy of the headlines on the leadership vote within the Conservative party yesterday. Sterling started the session on a weak footing, but rebounded intraday as markets saw a good chance of PM May surviving. This is exactly what happened. Even so, sterling couldn’t maintain gains below the EUR/GBP 0.90 level. PM May will try to get new concessions from EU leaders at a summit today. However, it is unlikely that this process will yield many GBP-supportive headlines. So yesterday’s sterling rebound might be short-lived.

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KBC Market Research Desk

KBC Bank

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