Forex today: Dollar sinks (DXY fell below 97 again) on steady ECB

Forex today saw the dollar sink back below the 97 handle momentarily following the European Central Bank surprising the doves by not mentioning a rate cut. Elsewhere, the focus was on the U.S. and Mexico's negotiations with respect to immigration and trade and while they did not come to any deal on Thursday and left matters very much unresolved, there was a sense of optimism which helped to buoy markets.  

Wall Street was bid on the hopes of a deal and a Bloomberg report suggesting that the U.S. would look to extend the deadline for a deal to be reached before imposing tariffs as soon as Monday next week.

• DJIA closed around 181 points up, or added 0.7%, to close near 25,721
• S&P 500 put on about 17 points, or 0.6%, to close near 2,844.
• Nasdaq Composite COMP added around 40 points, or 0.5%, to finish near 7,616. 

However, some late sound bites of the meeting and announcements by the likes of US Vice President Mike Pence and White House press secretary Sarah Huckabee Sanders reminded markets that tariffs were still very much on the cards as no progress has been made. Then what followed was news that US President Donald Trump plans to declare a new national emergency in order to implement sweeping tariffs on Mexico over the flow of Central American migrants to the US, according to a draft document of the declaration reviewed by The Hill.

Meanwhile, the ECB  made only modest changes to its outlook. The central bank emphasised that it will not hesitate to ease policy further should conditions warrant, noting there is “considerable headroom” for more QE. However, there was no mention of an imminent rate cut and instead, the ECB extended its forward guidance on keeping interest rates steady “at least through the first half of 2020” (previously “end of 2019”) and kept all other policy measures unchanged, as expected.

However, there was a dovish message in the event where Draghi again stressed the downside risks to growth from rising protectionism and weakness in the manufacturing sector. "Service and construction nonetheless remain on a moderate upward trend so the risks of a return to deflation are virtually non-existent, he said, whilst the ECB sees the risks of recession as very low. Taken in aggregate, however, growth is still soft and expected to fall back in Q2 and Q3. Inflation may well, therefore, dip in coming months and the ECB will need to remain very vigilant. Market-implied inflation expectations actually fell overnight. This perhaps reflects that the ECB has limited room for manoeuvre compared to the US Fed, and also the fact that Draghi has less than five months left in the job," analysts at ANZ bank explained.

Analysts at Westpac broke down the currency performances as follows:

• EUR/USD jumped from 1.1225 to 1.1309 – a six-week high - after the ECB statement did not signal rate cuts, steadying up 0.5% at 1.1275. 
• GBP/USD was choppy but ultimately flat just under 1.2700.
• USD/JPY probed lower in London trade, to just above 108.00, then recovered to 108.40/50 after a Bloomberg source story claimed that US tariffs on Mexico due Monday could be postponed as talks continue. (A subsequent report from The Hill was less optimistic). 
• AUD/USD ground slightly higher, from 0.6965 to 0.6994 then easing to 0.6980. 
• NZD similarly ground higher in London before slipping back to 0.6625. 
• AUD/NZD ranged sideways between 1.0510 and 1.0540.

Key notes from Wall Street:

• Wall Street closes in the green on Central Bank easing noise and US/Mexican immigration deal optimism

Key events ahead:

• UK by-election POLLS have closed: Nigel Farage's new Brexit Party could gain its first MP

Besides the outcome of the UK's by-elections, markets will focus on Australia’s housing market with loan approvals at 11:30am Syd/9:30am Sing/HK today ahead of the US May non-farm payrolls and average hourly earning. Then, we have the G20 finance ministers and central bankers meeting in Japan this weekend.