One day down from a heavy week of expected hard-hitting data and rate decisions, the forex market continues to chug along, with investors keeping their eyes on this week’s two key events – the European Central Bank’s (ECB) Thursday rate decision and Friday’s U.S. jobs report. The market continues to lean toward ECB President Mario Draghi delivering bold action to combat euro deflationary risks and boost the eurozone’s tepid growth prospects. But, will euro policymakers put into practice their strong rhetoric of late? That is the million-dollar (or euro) question. If Draghi and company fail to do so on June 5, then the ECB’s credibility is ‘damned’ – resulting in the market wanting to reverse aggressively some of the EUR’s weakness that has been evident since the last ECB meet.
Global Bourses Ride That Wave
Yesterday’s various global factory reports came in mixed. Manufacturing in the eurozone grew at a slower pace amid weakness in France, while manufacturing in China expanded last month at its fastest pace in five months. Forecasts for a rebound in the second-quarter U.S. growth, coupled with projected stimulus operations from the Bank of Japan and ECB in tandem with overall corporate earnings, will probably keep global bourses close to their new record policy. The fact that investors have limited return opportunities in other classes and have most of their eggs in one basket has not managed to dissuade the flow of cash into stocks. The S&P 500 ended May at a record high with Federal Reserve stimulus helping to propel the S&P higher by as much as +184% from its bear-market lows in March five-years ago.
No Rate Surprises
So far, today’s economic releases and central bank decisions would be hard-pressed to change the mindset of investors. On the rate front, the Reserve Bank of Australia (RBA) left its cash rate target unchanged at +2.50%, and as expected, the Reserve Bank of India (RBI) left all its key rates unchanged (+8.00%) but it happened to cut the banks’ Statutory Liquidity Ratio (SLR) by -50bps to +22.5%. The RBI stated in its rate decision that further policy tightening will “not be warranted if the economy remained on a disinflationary course, but it might ease policy should inflation slow faster than forecast.” Meanwhile, the RBA stated that its monetary policy remained accommodative and that the most prudent course was likely to be a period of “stability” in interest rates. From RBA Governor Glenn Stevens’ perspective, the AUD ($0.9275) remains high by historical standards.
Sell the Rumor, Buy the Fact
European data this morning has possibly sealed what’s expected from the ECB later this week. Undoubtedly not a massive surprise is the region’s consumer-price index (CPI) print at +0.5% versus consensus of +0.7%. The lay-up came from yesterday’s German inflation miss. The slip very much nails down a cut in the refi-rate and depo-rate on Thursday, taking the latter into negative territory for the first time. Anything less and the ECB and the eurozone will systematically be punished by capital markets. This CPI print has also helped confirm how the market is positioned for the pending ECB announcement — the Euribor, the Eonia curve, and EUR are little changed. This indicates that a ‘cut’ has been priced in.
It’s all down to Draghi’s press coverage tone – will he be able to push the EUR that much lower or will it be time to book some profit from that tired short-EUR against most Group of Seven trades? Also helping to give the EUR a leg up this morning is the unexpected drop in the April eurozone employment rate (+11.75% versus +11.85%). The single currency traded heavy into the release, matching the three-month low print of €1.3585 before bouncing back to above the psychological €1.3600. Do not be surprised to see some of the market lighten their positions ahead of Thursday’s rate decisions. A EUR break below €1.3560 will provide then next bearish trigger (€1.3475). But, does the EUR have the momentum? Resistance now appears topside at the 200-DMA at €1.3645.
Pound Struggles to Breathe
In the U.K., the Markit/CIPS construction survey for May came in slightly below the unchanged expectations of 60.8 to post a reading of 60 this morning. Despite remaining in expansion territory for the thirteenth month in a row, sterling is struggling. It traded at its best levels in one week going into the release, but a below-forecast has wiped out the majority of those gains. GBP dropped from around £1.6780 to £1.6755. Helping in the downfall is EUR/GBP being dragged higher after the CPI print (€0.8120). According to the techies, the pound’s loss of support at £1.6725 and £1.6715 would bring the focus sharply back into the £1.6694 low of last Thursday. Layers of resistance remain topside, starting at today’s highs and all the way up to £1.6885.
As we go deeper into the week patience becomes a necessary virtue.