Market Waits For ECB Monetary Policy Announcement
Swissquote Bank Ltd | Jun 02, 2016 07:41AM ET
Forex News and Events
Draghi should expect Brexit question
Expectations for today’s ECB policy meeting are relatively low with no monetary policy announcements. With the UK’s referendum on EU membership and new program of longer term funding for Eurozone banks just around the corner it is unlikely that Draghi will risk rocking the boat. In addition, EU inflation outlooks, supported by weaker euro, have improved lessening the immediate pressure for further monetary stimulus.
We anticipate that Draghi will reiterate that interest rates can go lower (including deposit facility rate) and that further micro tuning of lending facilities is possible - comments that should keep the spectre of easing alive and the euro on back footing. Our view is in contrast to speculation that the ECB has an incentive to signal a pause in cuts.
There is a growing belief that expectations for rates to head lower has caused banks to hold back borrowing from TLTRO facility (new four year duration borrowing starting 24th June) as they might expect further rate cuts. Given the EU economic enhancement and growing skepticism in the ECB’s current policy strategy we suspect that risky banks have a moderate appetite for borrowing before the era of cheap lending disappears.
Interestingly, today BoJ’s Takehiro Sato in blunt terms indicated that negative policy rates combined with QE is ineffective. Also, Draghi’s past efforts in lowering expectations for rate cuts has actually driven EU rates and euro higher - a result he certainly does not want. Markets will be interested in revised staff macroeconomic forecasts, especially the view on inflation. However, the highlight of the press conference for us will be the media pelting Draghi with hypothetical questions on Brexit. Clearly, Draghi will not get baited into giving something away but we can always hope. EUR/USD at 1.1096 200d MA provides support and buying opportunities with 1.1243 near term resistance.
Expect no agreement in Vienna
There was plenty of hype heading into this week’s OPEC meeting in Vienna with members trying to build their case for relevance. However, divergence between Saudi Arabia and Iran is expected to once again derail any progress on restricting output. Incoming comments from Iran’s oil minister indicates that an agreement on an oil production cap is unlikely. The lack of any formal output targets suggests that this meeting is probably going to be a bust.
Commodity prices have decoupled with oil prices heading higher, with the rest of the complex falling sharply lower. Iron ore front-month is at 346.0 lingering around 3-month lows prompting many to expect a drag on oil. Despite weak Chinese economic data and global slowdown in PMI manufacturing reads we are not ready to call an oil price reversal. First, we are not confident in a Fed summer rate hike, which might dent demand, and second, supply is slowing coming off-line and slow to reboot. Finally, US summer driving season has kicked off, with good weather nationally, suggesting that decline in oil inventories should continue.
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Watching ADP
In the US session, traders will be watching ADP employment change. ADP is expected to rise 173k from 156k in April. This read will help forecast Friday’s important NFP report, which is the last major economic data release before Fed Chair Yellen’s 6th June policy speech. This speech should provide insight into the Fed’s view on rate hike timing. However, ADP have had some spectacular misses in the past and remain cautious about over adjusting expectations based on ADP.
We expect further deceleration in labor markets as external conditions remain weak. Incoming US manufacturing data, along global reads, continue to signal demand softness, a fact that will not be lost on the FOMC members and the basis for our view for no hike in June. We remain bearish on USD as see rallies as an opportunity to reload shorts (short term trades).
The Risk Today
Peter Rosenstreich
EUR/USD is growing. Hourly resistance is located at 1.1243 (23/05/2016 high) and 1.1349 (17/05/2016 high). Hourly support can be found at 1.1058 (16/03/2016 low). The technical structure suggests further downside move. In the longer term, the technical structure favours a very long-term bearish bias as resistance at 1.1714 (24/08/2015 high) holds. The pair is trading in range since the start of 2015. Strong support is given at 1.0458 (16/03/2015 low). However, the current technical structure since last December implies a gradual increase.
GBP/USD is now pausing above 1.4400 despite the pair has broken strong support at 1.4404 (15/05/2016 low). Hourly resistance is given at 1.4508 (01/06/2016 high) while stronger resistance is located at 1.4770 (03/05/2016 high). Expected to show renewed bullish momentum toward resistance at 1.4770 if support at 1.4300 is not monitored. The long-term technical pattern is negative and favours a further decline towards key support at 1.3503 (23/01/2009 low), as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.
USD/JPY's selling pressures are back on. Hourly support may be found at 108.72 (18/05/2016 low) and hourly resistance is given at 111.45 (30/05/2016). Yet, the medium term momentum is oriented downwards and the technical structure suggests a stronger bearish move. We favour a long-term bearish bias. Support at 105.23 (15/10/2014 low) is on target. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems now less likely. Another key support can be found at 105.23 (15/10/2014 low).
USD/CHF is trading slightly lower. The resistance at parity looks far. Hourly support at 0.9872 (26/05/2016 low) has been broken. Expected to show a continued bearish move. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours a long term bullish bias since last December.
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