US Session Forex Brief, June 6 – The Euro Surges on A Not-So-Dovish ECB
Skerdian Meta • 4 min read
The economic data has been pretty light today and the main theme in financial markets is the European Central Bank (ECB) meeting. The economy of the Eurozone, as well as the global economy have weakened considerably this year. Besides that, inflation is really weak in the Eurozone and the US has been threatening with auto tariffs on European car makers. As a result, we have heard some really dovish comments from ECB members in recent weeks regarding low inflation which turned even lower after the short lived jump in April which was due to the Easter holidays and especially about postponing the first rate hike.
The ECB left key rates unchanged as expected with deposit rates at -40% and refinancing rates at 0.0% and they confirmed the rumours in the statement about postponing rate hikes again. Now they won’t move interest rates higher before the H2 of next year, which is a long way from now. The Euro lost around 40 pips initially but then it reversed higher on comments about the TLTRO programme. The change in forward guidance is noticeably dovish but the the rate applied for the TLTRO is something that will benefit banks/financial institutions in the region, that’s a hawkish decision, hence the jump in the Euro. Draghi’s comments were not as dovish as the market was expecting and the Euro ended up more than 100 pips higher after that, with EUR/USD piercing above 1.13.
- Eurozone Final GDP and Employment Change – The Eurozone employment change has been pretty steady, growing at around 0.3% per month. We have seen dips to 0.2% and increases to 0.4% but on average it remains at 0.3% and today’s report showed that exactly, as expected. The GDP also remained unchanged from the first reading, growing at 0.4% in Q1.
- Moody’s Comments on Italian Debt – Moody’s commented on the situation regarding the debt in Italy, saying that EU fines are unlikely to sway Italy in debt procedure. They’re skeptical that the threat of EU fines will be an “effective incentive” for Italy and expects Italian public debt to continue to rise in the coming years. The absence of credible strategy continues to expose Italy to adverse shifts in investor sentiment. Moody’s believes that Italy’s 2020 budget will be an important milestone in assessing the direction of the country’s creditworthiness.
- Trump on China and Mexico – Yesterday we heard some softer tones from China and Mexico, but today the tones have increased again. Donald Trump started the ping-pong first saying that Mexico has made progress in tariff talks but needs to do more. We’ve told Mexico the tariffs will go on if progress is not made. Mexico has to ‘step up to the plate’; progress being made. Talks are ongoing with China on trade, tariffs on China could be raised by another $300 billion if necessary and China wants to make a deal, Mexico wants to make a deal badly.
- China Replying Back – China’s foreign ministry also commented on the matter. China says will have to adopt necessary countermeasures if US decides to escalate trade tensions. Future direction of trade talks depends on the US. Trade war will hurt US economy, employment. US claims of China taking advantage in bilateral trade are groundless. Says will fight to the end if US decides to escalate trade tensions. US’s large-scale measures on Huawei are “astonishing”. US changed position in talks, so they shouldn’t accuse China.
- Di Maio Doesn’t Accept the Debt Procedures from the ECB – Italian deputy prime minister, Luigi Di Maio, commented this morning saying that Italy won’t heed EU call for debt cuts. EU has made ‘absurd’ requests on investments but she also said that that not all EU parameters must be abolished. There should not be a corrective budget.
- ECB Rate Decision and Statemnt – The ECB left key rates unchanged as expected, with refinancing rates at 0.00% and deposit rates at -0.40%. The statement said that the ECB sees rates at present levels at least through 1H of next year, the The ECB is to reinvest QE debt for extended period of time after the first rate hike, rates will remain likely where they are until inflation reaches its goal and prices new TLTRO at MRO +10bps. TLTRO rate can be as low as deposit facility +10 bps. The consensus in the markets for the TLTRO rate was somewhere around MRO -20bps so that is the biggest surprise in the statement here.
- ECB Press Conference – The opening comment from Mario Draghi: Economic data was ‘somewhat’ better than expect in Q1. He continued saying that the data about the economy are not bad. There isn’t a substantial worsening in the outlook, that’s why the extension is for seven-months, The drop in market-based inflation expectations is global, certainly something we take into account. The Euro lost 35 pips initially on comments about postponing the rate hike, but reversed higher on the TLTRO comments.
- Revised Unit Labor Costs QoQ – Unit labour costs increased by 2.0% in Q4 of last year which is great, but the first reading for this month showed a reversal and a 0.9% in labour costs. That wasn’t even the worst because the revisions today showed an ever bigger decline of 1.6%, while expectations were that labour costs remain the same.
- The trend has turned bearish this week
- The 20 SMA is pushing the price down
- The retrace up is complete
The retrace ended at the 20 SMA
USD/CAD has turned bearish this week as the USD keep declining since last Friday. The price formed a few dojis at the top last Friday and then reversed lower, breaking the 20 SMA (grey). that moving average turned immediately into resistance for this pair and eventually the 50 SMA (yellow) was broken as well and then the other moving averages. Yesterday we saw a retrace higher but it ended at the 20 SMA again, so it seems that this moving average has turned into resistance now. The price has been reversing lower today, so the picture for USD/CAD is pretty bearish.
EUR/USD jumped around 100 pips higher after the press conference from Mario Draghi which wasn’t as dovish as markets were expecting and broke above the 1.13 level for a moment, but it returned back down pretty quickly so the break doesn’t count. Although, it might break higher again because the US Dollar is still pretty bearish.