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Euro, Yen May Fall as Pound Gains on Confidence-Boosting ECB Tone

Euro, Yen May Fall as Pound Gains on Confidence-Boosting ECB Tone

Talking Points:

  • ECB rate decision unlikely to bring immediate policy stance change
  • Markets to focus on post-Brexit countermeasures, Italian bank risk
  • Euro, Yen to fall as Pound gains on confidence-boosting ECB tone

All eyes are on the ECB monetary policy announcement. Euro-area financial conditions have recovered from tightening in the run-up to the UK Brexit referendum, so further action seems unlikely at this stage. The post-meeting press conference with ECB President Mario Draghi may prove to be a major market mover however.

Investors will look to be reassured on two fronts. First, they will want the ECB to firmly establish that it has the tools to fight back if knock-on negativity following the Brexit vote intensifies, as well as a willingness to use them. Second, they will want an assurance that the Bank is prepared to support tottering Italian banks.

An undesirable side-effect of lowering borrowing costs further is that it hurts Eurozone banks’ earnings at a time when an abundance of bad debt has left Italian lenders particularly vulnerable. Indeed, shares in the country’s top financial institutions plunged after the Brexit vote, revealing traders’ concern about their viability in the event that the ECB is forced to ease further.

For its part, the central bank may be non-committal until it publishes bank stress tests for the region on July 29. In the meantime, markets will want to hear that it is prepared to back a somewhat augmented “bail-in” process that spares retail investors that own Italian bank paper from suffering large losses as part of a “precautionary” capital injection (i.e. one that doesn’t trigger bankruptcy per Eurozone rules).

If both of these conditions materialize, swelling risk appetite is likely to weigh on the Japanese Yen. It may likewise temporarily boost the typically sentiment-geared Australian and New Zealand Dollars, although follow-through seems unlikely. Both currencies have notably diverged from binary risk on/off dynamics recently amid swelling RBA and RBNZ rate cut speculation.

Interestingly, the British Pound may find broad-based strength in this scenario. A post-Brexit slowdown in the UK threatens to export weakness across the English Channel. The very same channels of transmission may echo support from an expanded ECB monetary policy cushion in the opposite direction. Needless to say however, the Euro may suffer.

The Kiwi Dollar underperformed in overnight trade after the RBNZ released a dour inter-meeting assessment of economic conditions, boosting bets on a rate cut to be announcement next month. The Yen likewise faced selling pressure as Asian shares advanced, undermining demand for the perennially anti-risk Japanese unit.

Are traders long or short EUR/USD before the ECB rate decision? Find out here !

Asia Session

GMTCCYEVENTACTEXPPREV
21:00NZDRBNZ Publishes Assessment of Economy---
22:45NZDNet Migration SA (JUN)5670-5560
01:00CNYSwift Global Payments CNY (JUN)1.72%-1.90%
01:30AUDNAB Business Confidence (2Q)2-4
01:30AUDRBA FX Transactions Government (JUN)-1731m--916m
01:30AUDRBA FX Transactions Market (JUN)1720m-909m
01:30AUDRBA FX Transactions Other (JUN)36m-25m
03:00NZDCredit Card Spending (MoM) (JUN)-0.8%-0.1%
03:00NZDCredit Card Spending (YoY) (JUN)4.1%-6.0%
04:30JPYAll Industry Activity Index (MoM) (MAY)-1.0%-1.1%0.8%
05:00JPYSupermarket Sales (YoY) (JUN)-0.5%--1.3%
06:00JPYMachine Tool Orders (YoY) (JUN F) -19.9%--19.9%

European Session

GMTCCYEVENTEXP/ACTPREVIMPACT
06:00CHFTrade Balance (JUN)3.55b (A)3.78bLow
06:00CHFExports Real (MoM) (JUN)-3.3% (A)-1.0%Low
06:00CHFImports Real (MoM) (JUN)-4.0% (A)-0.6%Low
07:00CHFMoney Supply M3 (YoY) (JUN)-2.0%Low
08:30GBPRetail Sales Ex Auto Fuel (MoM) (JUN)-0.6%1.0%Medium
08:30GBPRetail Sales Ex Auto Fuel (YoY) (JUN)4.8%5.7%Medium
08:30GBPRetail Sales Inc Auto Fuel (MoM) (JUN)-0.6%0.9%Medium
08:30GBPRetail Sales Inc Auto Fuel (YoY) (JUN)5.0%6.0%Medium
08:30GBPPublic Finances (PSNCR) (JUN)-3.4bLow
08:30GBPCentral Government NCR (JUN)-6.0bLow
08:30GBPPublic Sector Net Borrowing (JUN)9.2b9.1bLow
08:30GBPPSNB ex Banking Groups (JUN)9.5b9.7bLow
11:45EURECB Main Refinancing Rate (JUL 21)0.00%0.00%High
11:45EURECB Deposit Facility Rate (Jul 21)-0.40%-0.40%High
11:45EURECB Marginal Lending Facility (JUL 21)0.25%0.25%High
11:45EURECB Asset Purchase Target (JUL)€80b€80bHigh

Critical Levels

CCYSupp 3Supp 2Supp 1Pivot PointRes 1Res 2Res 3
EURUSD1.09131.09611.09881.10091.10361.10571.1105
GBPUSD1.28441.30051.31071.31661.32681.33271.3488

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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