FX: Swiss central bank to strike ultra-cautious tone

We expect the Swiss central bank to follow the ECB's dovish lead today. Here's what that could mean for the franc.

USD: The ongoing sanction/tariff uncertainty

President Trump’s policy of sanction/tariff threats remains fully in place with the Nord Stream 2 pipeline now being in focus. Such policies and the high level of unpredictability (as seen with the Mexico tariff threat in previous weeks) leave the outlook for risk assets uncertain, particularly as a US-China trade deal remains elusive and the eurozone car market still faces the threat of tariffs on exports. This should keep US Treasury yields fully in check and limit the scope for their rise ahead of the FOMC meeting next week, in turn suggesting a stable dollar.

EUR: Another sluggish economic reading

Our economists don’t expect any material change in the sluggish trend of eurozone industrial production. The downward trend is unlikely to have been broken in April, as activity surveys have remained subdued and German production data came in soft. This should keep EUR/USD upside in check with the market eyeing the June FOMC meeting next week as the next catalyst for a meaningful move in the cross. EUR/USD to stay close to the 1.1300 level, with a modest downside bias.

GBP: Voting process for the next Conservative leader starts today

The pound briefly spiked after the leading Conservative Party candidate Boris Johnson’s speech yesterday. He struck a more conciliatory tone, citing a hard Brexit as a last resort. The first round of votes among conservative MPs starts today, with 17 votes from MPs being necessary for a candidate to qualify for the next round. As was the case yesterday, we see any spike in GBP as temporary and expect EUR/GBP to grind higher and above the 0.90 level over the course of the summer, as the rising likelihood of early elections later this year (to break the inevitable gridlock in Parliament) weighs on sterling.

CHF: SNB to sound ultra-cautious today

Following last week’s dovish European Central Bank meeting, we would expect the Swiss National Bank to sound equally dovish at its quarterly monetary policy meeting today. Currently the SNB remains committed to using negative rates (policy rate is 3m CHF Libor at -0.75%) and FX intervention to keep monetary conditions loose and we see no change in these policies. It would not be a surprise to see the SNB talking up international risks and also talking down inflation to support its commitment to ultra-loose policy for longer. The problem for the SNB is that the ECB looks close to cutting rates again and re-starting quantiative easing has been discussed. (Recall the prospect of ECB QE forced the SNB to abandon the 1.20 EUR/CHF floor in Jan 2015). EUR/CHF could get a brief lift on a dovish SNB today, but we’d expect the move to fade near 1.13. And the prospect of ECB easing and a flare-up in Italian politics should keep EUR/CHF biased to 1.11, possibly 1.10, this summer.

FX: Swiss central bank to strike ultra-cautious tone