Euro May Fall as Aussie, NZ Dollars Rise on Chastened ECB Stance

2018-04-26 05:00:00

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TALKING POINTS – ECB, EURO, AUSSIE & NEW ZEALAND DOLLARS
ASIA PACIFIC TRADING SESSION
EUROPEAN TRADING SESSION

TALKING POINTS – ECB, EURO, AUSSIE & NEW ZEALAND DOLLARS

Euro may fall as the ECB casts doubt on near-term QE tapering
Aussie, NZ Dollars may rise as dovish Draghi lifts risk appetite
US Dollar correcting from six week high in Asia Pacific session

All eyes are on the ECB monetary policy announcement in European trading hours. No formal changes to the central bank’s posture are expected but traders will probably put considerable weight on the tone of remarks made by President Mario Draghi at the subsequent press conference. A dovish lean might weigh on the Euro but could offer a lift to broad-based risk appetite.

Mr Draghi and his colleagues have signaled they are well aware of incoming disinflationary pressure from base effects arising the single currency’s explosive gains last year. That may be difficult to overcome by an economy where growth seems to have slowed sharply in the first quarter, according to leading PMI surveys. This might prompt signaling that an extension of QE remains on the table.

The current program making €30 billion in asset purchases per month expires in September. An abrupt end seems broadly understood as ill-advised, so traders have been waiting for the ECB to unveil whether it will “taper” uptake into the current end-date, announce a plan to begin doing so thereafter, or prolong the effort. Setting the stage for a June decision alongside a forecast update may well happen today.

Comments that explicitly cast doubt on whether the ECB favors tapering versus prolonging QE bode ill for the Euro. So too does vague rhetoric hinting that uncertain officials fear tightening prematurely. The prospect of a longer-lasting ECB liquidity backstop may boost risk appetite however, boosting the sentiment-geared Aussie and New Zealand Dollars.

The US Dollar corrected lower in otherwise quiet Asia Pacific trade, retracing some of its steps after soaring to a six-week high. Swelling Fed rate hike speculation still seems to be the driving catalyst, with the spread between the 10-and 2-year Treasury bond yield telling widening to the biggest in a month. Meanwhile, the tightening path through 2019 priced into Fed Funds futures steepened.

See our quarterly FX market forecast s to learn what will drive prices through mid-year!