Will Draghi React To Low Inflation Dynamics?

h3 Forex News and Events:/h3

The ECB will give its policy verdict at 11:45 GMT and the ECB President Draghi will give his monthly press conference at 12:30 GMT. The week started with weak inflation figures out of the Euro-zone. The CPI y/y estimate for March eased from 0.6% to 0.5%, while the core CPI y/y first reading in March stepped down to 0.8% from 1.0% a month ago. While the ECB President Draghi keeps repeating that the inflation expectations in the Euro-zone are well anchored (unlike 1990’s Japan), the recent rate cuts couldn’t remedy to Euro-zone’s disinflationary pressures. Will Euro-zone face deflation?

According to ECB’s Weidmann, the Euro-zone is not in a deflationary spiral (which is true, for how long?) and the ECB should not overreact to falling EZ prices as lower consumer prices are partially explained by softer energy and unprocessed food prices. Although the EZ is not yet in deflationary spiral, half a percentage point lower, we will be talking about deflation in the Euro-zone. And the experience showed: fighting deflation is not an easy job (Japan fights decelerating prices since more than 10 years!)

At this stage, we are curious to hear more about what Draghi has to say on four-year low inflation figures, despite historical low policy rates (main refi at 0.25%, deposit rate at 0.00%). We are already informed that ECB is ready to use additional liquidity tools if needed as LTROs, OMT and may even consider negative deposit rates. Yet Mr. Draghi knows well: a monetary policy alone cannot succeed given the significant divergences in Euro countries’ fiscal policies. The markets mainly price out the possibility of a dovish move from ECB at today’s meeting. Yet the risk is not null. EUR/USD retreated to 1.3755 in Asia (slightly above the Fibonacci 23.6% on Nov-Dec rally), traders are reluctant to long euros pre-ECB. While the technical picture remains bearish, EUR-complex is subject to two-side volatility. An ECB inaction (& confident Draghi) should trigger a relief-rally in EUR-crosses. On EUR/USD chart, a break above the 21-dma (weekly resistance) should revive EUR-bulls pre-NFPs. Option bids trail above 1.3785 for today’s expiry, while selling pressures should intensify below 1.3725 (post-CPI reaction low & week low).

h2 Turkey inflation accelerates, limited market reaction/h2

The Turkish consumer prices accelerated from 0.43% to1.13% month-on-month in March, from 7.89% to 8.39% year-on year. The CPI core hiked from 8.43% to 9.32%, the highest since April 2007. Pre-election uncertainties and the rising political / social unrest lifted the inflation expectations in March, especially given the TRY depreciation risk. Now that the municipal elections are over (although disputes on “who won” continue), the jittering in TRY should ease at least in the short run. Post-election TRY rally sent lira to end-2013 highs versus USD. If TRY strength is preserved, the improved investor confidence and fading energy prices should help cooling down the upside pressures on unprocessed food prices due to risk of drought for coming months.

In the coming days, the post-election rally in USD/TRY is expected to slow down as we approach the oversold conditions in USD/TRY and EUR/TRY (30-day RSI at 32.2% & 31.8% respectively). The psychological support should hold still at 2.1000 versus USD. More importantly, if Turkey Central Bank’s goal is to fight the current account deficit, a lira below 2.1000 will fade expectations on hawkish policy action from the CBT, pushing USD/TRY back at 100-dma levels (currently at 2.1567). Decent option barriers trail below 2.2000 through April. Given the current environment, if Fed expectations remain balanced, we believe that CBT will keep its liquidity tightening / lira supportive tools (i.e. interest payment to TRY RR holdings) on the shelf.

h3 The Risk Today:/h3

EUR/USD weakened yesterday, breaking the short-term rising trendline. Furthermore, the declining trendline still favours a bearish bias. Key supports stand at 1.3705 and 1.3643. Resistances can be found at 1.3847 (25/03/2014 high, see also the declining trendline) and 1.3876. Today's ECB meeting is likely to increase intraday volatility. In the medium-term, the break of the support at 1.3834 (11/03/2014 low, see also the rising channel) coupled with general overbought conditions favour a move lower towards the support at 1.3643. The recent high at 1.3967 is likely to act as a strong resistance.

GBP/USD is moving sideways after its recent rise. However, the short-term momentum remains positive as long as the hourly support at 1.6598 (28/03/2014 low) holds. Hourly resistances can be found at 1.6684 and 1.6718. Another hourly support stands at 1.6555 (27/03/2014 low). In the longer term, prices continue to move in a rising channel. As a result, a bullish bias remains favoured as long as the support at 1.6460 holds. Another key support stands at 1.6220 (17/12/2013 low).

USD/JPY has broken the resistance at 103.76. Another horizontal resistance stands at 104.92 (16/01/2014 high). Monitor the hourly supports at 103.59 (02/04/2014 low) and 103.44 (31/03/2014 high) as the current rise looks short-term overextended. A long-term bullish bias is favoured as long as the key support area given by the 200 day moving average (around 100.66) and 99.57 (see also the rising trendline from the 93.79 low (13/06/2013)) holds. A major resistance stands at 110.66 (15/08/2008 high).

USD/CHF has bounced close to the support implied by its rising trendline. Monitor the key resistance at 0.8896. Hourly supports stand at 0.8814 (01/04/2014 low) and 0.8787. Another key resistance lies at 0.8930. From a longer term perspective, the structure present since 0.9972 (24/07/2012) is seen as a large corrective phase. The recent technical improvements suggest weakening selling pressures. A key resistance lies at 0.8930.