Market News & Insights
31 May 2017

Heavy Expectations On ECB

Risk was slow to start the week and stocks in Europe traded lower on the day. We mentioned yesterday some rumours that Greece may not be in a position to make its next debt payment and that sentiment combined with some concerns Italy will face an early election saw riskier assets facing selling pressure.

European stocks have now declined for 4 straight days and sentiment this morning still remains slightly subdued. The US followed the European lead with equity markets trading lower, however they did manage some recovery from the lows despite a mixed bag of data. GBP found itself under pressure, a rally early in the day was wiped out late last night following a YouGov/Times poll suggesting the Tories would be falling 16 seats short of a majority. This saw GBPUSD drop from 1.2864 to 1.2792, by no means a flash crash but enough to highlight the downside vulnerability to GBP around election headlines. In a similar vein EURGBP popped from below .8700 to .8740.

The Euro was an outperformer following a headline suggesting ECB “sources” would be looking to discuss the removal of easing bias in the June meeting. Again, much like the taper tantrum we saw in the US a couple of years ago, eventually these things will have to be discussed but the question to ask is the Euros 7% rally from March justifiable on an expectations basis? Overnight sentiment remained to the downside, the JPY rallied through the early part of this morning and currently holding firm against the USD.

It goes without saying we would expect the ECB to begin discussing the normalisation of policy, especially given recent upbeat Eurozone data but the ECB continue to warn that the data is overstating the health of the economy and even should they look to scale back easing, rates will remain at current record low levels for some time to come.

The key difference between the ECB and when the Fed found themselves in this position is the ECB have set a fixed end date. December is when they are expected to finish their QE program, market is positioning the Euro for this to stop completely but the majority expect the ECB to scale back or “taper” their monthly purchases. Unless they decide to do this in Q3 or Q4, which no one is expecting currently, then the idea of any tapering would have to be based on the ECB extending their easing program. If this is the case then should the Euro be up 7% against the USD in 3 months (including a rate hike month for the Fed).

The answer quite simply is no. We are all keen to hear what the ECB has to say about its program and guidance as well as growth expectations, but it might well be the case of “buy the rumour sell the news” for Euro pairs. EURUSD still finding sellers above 1.1200 while 1.1162 and 1.1120 provide support to moves lower. EURGBP pressing higher once more with overnight resistance .8741, light downside support at .8711 and firmer at .8656. Eurozone inflation is due at 10.00am and set to decline to 1.5% from 1.9%, this may well see Euro under additional downside pressure, while unemployment data is also due. There are also several ECB speakers due throughout the day so given the “tapering” backdrop, we’ll be keeping a close eye on what they have to say.

We are light on major data from the UK, while the Feds beige book of economic activity should provide us with some detail on the economic landscape across the various Federal precincts. There are also some Fed speakers due out and again we will need to see them towing the party line that the Fed will look to raised rates in the June meeting, should this rhetoric continue into June and data become supportive, the USD has plenty of scope to rally. Last week GBPUSD broke through the 1.2900 area we’ve been highlighting for several weeks, that indicates additional downside is ahead and yesterday’s rally fell short of regaining that 1.2900. We’ll need to see a break below the 1.2750 area to confirm the downside bias but its looking like we won’t have to wait too long for that.