Euro Firms On ECB's Inflation Outlook

The Euro has been well bid versus the US dollar as well as the crosses since Mr Draghi took the podium for his post-ECB press conference yesterday.

Long-time viewers of Mr Draghi's Q&A sessions will have noticed two things: the last three press conferences have been about 20 minutes shorter than usual, and, none of the reporters asks really pointed questions about the EU banking system, the growing rate of non-performing loans or Brexit.

In fact, for most of the Q&A session, Mr Draghi didn't say anything to surprise the market.

He repeated the ECB's plan to cut the amount of QE asset purchases before the end of the year, even though he qualified that comment as "market dependent." We believe that this is the part that Forex traders need to focus on since the ECB staff projections lowered their GDP forecasts for the rest of this year and into 2019.
During the last ECB meeting, the staff projected 2018 GDP growth of 2.4%, which was revised to 2.1% yesterday. Further, the EU growth forecast for 2019 was shaved from 1.9% down to 1.8%.

We've seen this before from the ECB and have little doubt that these number will be revised lower again. Economic expansion will be very hard to come by in an environment of increasing stress in the banking sector combined with political stagnation.

Interestingly, the EUR/USD rallied back up through the 1.1700 handle as Mr Draghi expressed his opinion that "core" inflation was firm and increasing "at an accelerated rate". Over the last three months, there has been little in the EU high-frequency data that supports this notion.

As such, we consider the recent rally in the EUR/USD to be corrective in nature and look for a break back below the 1.1640 level as the US FOMC meeting approaches. 

USD/JPY

With the USD/JPY pushing the 112.00 level for the first time in over a month, we will look to add short exposure just above the market.  

GBP/USD

Even though the Bank of England (BoE) voted 9 to 0 to leave UK rates unchanged yesterday, the Sterling was able to push to a 1-month high of 1.3135 during today's Asian session. It's been a few weeks since any Brexit headlines have negatively impacted the GBP/USD, so the market is probably overdue.

AUD/USD 

The AUD/USD got a lift this week as domestic employment numbers surprised to the upside and on rumours that US and Chinese trade tensions have come off the boil. It's our view that the former will be revised lower and the latter will resurface soon enough.

On balance, the overnight swap reversal from positive to negative to be long the AUD/USD is a game changer for Aussie bulls.