Euro doesn’t decline despite soft ECB

KBC Market Research Desk KBC Bank

EUR/USD made some sharp swings yesterday. The pair traded near recent top close to 1.1280 at the start of the ECB press conference. Draghi admitted that the EMU growth slowdown is more profound than expected. In this context, EMU rates might stay (very) low for longer. The euro sank during the press conference. However, US yields also declined even as US inflation was close to expectations. The US-German rate differential didn't widen despite a soft ECB. EUR/USD soon reversed its post-ECB loss. US Treasury Secretary Mnuchin indicating that the US and China agreed on the FX part of a trade deal maybe was a USD negative, too. The Minutes of the March Fed meeting confirmed a balanced wait-and-see approach and didn't cause a further USD decline. EUR/USD closed at 1.1274 (from 1.1263). USD/JPY finished at 111.01. Asian equities mostly show moderate losses this morning with China underperforming. The dollar stays in the defensive (EUR/USD 1.1280 area; USD/JPY low 111.00 area). Today, the eco data in the US and Europe are second tier. US jobless claims are expected to remain low. Y/Y US PPI inflation is expected little changed from last month. Several Fed governors are scheduled to give their view on the economy.

Yesterday price action in EUR/USD was quite remarkable. The euro and the dollar both felt downside pressure. Despite a soft ECB, the dollar finally returned near this week's lows. The jury is still out, but the US and China reaching an agreement on FX might be a harbinger of the US persuing a more active ‘nottoo- strong' dollar policy. Maybe the US has more leverage/means to keep its currency weak compared to the likes of the ECB and the BOJ. Last week, EUR/USD came close to the 1.1177/87 support, but a real test/break didn't occur. For that to happen, unexpected negative EMU news or surprisingly strong US data are needed. Recent data evidence doesn't support this scenario. We keep the view that a sustained EUR/USD break lower isn't evident. Yesterday and Tuesday, it looked that the EUR/USD rebound could lose momentum. However, looking at yesterday's price action, some further by default USDlosses/ euro gains are still possible.

The EU gave the UK more time resolve the pollical statement on Brexit. A flexible time table allows the UK to stay in the EU to Oct 31. The reaction of sterling was telling. EUR/GBP hardly reacted. The pair continued to hover near the 0.86 pivot. With the UK heading for a new period of domestic political uncertainty, we see no reason to turn more positive on sterling. The BoE has also no reason to raise rates anytime soon. We assume the EUR/GBP 0.85 support area to be solid.

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KBC Market Research Desk

KBC Bank

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