EURUSD: Draghi was less dovish than usual. What's next?
Macroeconomic overview
The ECB left all its interest rates unchanged yesterday. Despite accelerating growth and headline inflation, the Governing Council decided to retain the easing bias on interest rates (interest rates will remain “at present or lower levels for an extended period of time”) and to confirm the guidance on asset purchases, including the commitment to buy more if the outlook deteriorates or financial conditions tighten excessively. However, below the surface, the easing bias appears to have been watered down by a small hawkish change to the introductory statement (the ECB omitted the pledge to use “all the instruments” within its mandate to reach price stability) and increased confidence about the growth outlook, which induced Draghi to acknowledge an improvement in the balance of risks and less urgency for further action.
The updated staff projections were broadly in line with our expectations. The forecast for headline CPI in 2017 was boosted to 1.7% from 1.3% on the back of higher energy and food prices, while the number for 2018 was revised up by 0.1pp to 1.6% and the important 2019 figure remained at 1.7%, i.e. slightly below the definition of price stability. We also note that the ECB revised slightly higher the core inflation projections for 2018 and 2019, by 0.1pp in each year, probably to take into account stronger indirect effects from higher commodity prices and a slightly faster narrowing of the output gap. At 1.1% in 2017, 1.5% in 2018 and 1.8% in 2019, the core inflation trajectory seems too steep in the final part of the forecast horizon, especially when considering that so far in this recovery phase the path has been very flat. Both the growth outlook and the balance of risks around it improved from three months ago. Now, the ECB expects 1.8% GDP growth in 2017 (from 1.7%), followed by 1.7% in 2018 (+0.1pp) and an unchanged 1.6% in 2019. The technical assumptions reveal a slight upgrade of the ECB view on global growth and trade: this is important, because it’s the first positive revision in three years. As the confidence about the global environment increases, the ECB sees downside risks to domestic economic activity starting to recede.
The tone of Draghi’s press conference was less dovish than usually. The main concession to the hawks was an improvement in the balance of risks – although this is still tilted to the downside – and Draghi’s explicit acknowledgment of a reduced sense of urgency for further measures, which effectively seems to weaken the easing bias. Regardless of the exact semantics, the lack of an upward trend in core inflation is the key factor preventing a more hawkish shift in ECB rhetoric despite the more favorable growth assessment. We expect the Governing Council to remain in wait-and-see mode in the next few months and to announce a further tapering of asset purchases in September, with implementation starting in early 2018.
Focus turns to U.S. non-farm payrolls today. Markets are now pricing in an almost 90% chance of a hike, so we should not expect a strong USD reaction in case of better-than-expected U.S. jobs report. The reaction could be much stronger in case of disappointing data.
Technical analysis
The EUR/USD closed above 7-day exponential moving average (1.0582) yesterday, which is an important bullish signal. The next resistance level is 1.0640 high on March 6. This level is also 38.2% fibo of January-February rise. Breaking above this resistance may open the way for stronger EUR/USD recovery.
Trading strategy
We stay long for 1.0820. Hawkish shift in ECB statement may weigh on market in the coming days, , while Fed hike in March has been already priced in.
GrowthAces.com - Daily Forex Trading Strategies
The ECB left all its interest rates unchanged yesterday. Despite accelerating growth and headline inflation, the Governing Council decided to retain the easing bias on interest rates (interest rates will remain “at present or lower levels for an extended period of time”) and to confirm the guidance on asset purchases, including the commitment to buy more if the outlook deteriorates or financial conditions tighten excessively. However, below the surface, the easing bias appears to have been watered down by a small hawkish change to the introductory statement (the ECB omitted the pledge to use “all the instruments” within its mandate to reach price stability) and increased confidence about the growth outlook, which induced Draghi to acknowledge an improvement in the balance of risks and less urgency for further action.
The updated staff projections were broadly in line with our expectations. The forecast for headline CPI in 2017 was boosted to 1.7% from 1.3% on the back of higher energy and food prices, while the number for 2018 was revised up by 0.1pp to 1.6% and the important 2019 figure remained at 1.7%, i.e. slightly below the definition of price stability. We also note that the ECB revised slightly higher the core inflation projections for 2018 and 2019, by 0.1pp in each year, probably to take into account stronger indirect effects from higher commodity prices and a slightly faster narrowing of the output gap. At 1.1% in 2017, 1.5% in 2018 and 1.8% in 2019, the core inflation trajectory seems too steep in the final part of the forecast horizon, especially when considering that so far in this recovery phase the path has been very flat. Both the growth outlook and the balance of risks around it improved from three months ago. Now, the ECB expects 1.8% GDP growth in 2017 (from 1.7%), followed by 1.7% in 2018 (+0.1pp) and an unchanged 1.6% in 2019. The technical assumptions reveal a slight upgrade of the ECB view on global growth and trade: this is important, because it’s the first positive revision in three years. As the confidence about the global environment increases, the ECB sees downside risks to domestic economic activity starting to recede.
The tone of Draghi’s press conference was less dovish than usually. The main concession to the hawks was an improvement in the balance of risks – although this is still tilted to the downside – and Draghi’s explicit acknowledgment of a reduced sense of urgency for further measures, which effectively seems to weaken the easing bias. Regardless of the exact semantics, the lack of an upward trend in core inflation is the key factor preventing a more hawkish shift in ECB rhetoric despite the more favorable growth assessment. We expect the Governing Council to remain in wait-and-see mode in the next few months and to announce a further tapering of asset purchases in September, with implementation starting in early 2018.
Focus turns to U.S. non-farm payrolls today. Markets are now pricing in an almost 90% chance of a hike, so we should not expect a strong USD reaction in case of better-than-expected U.S. jobs report. The reaction could be much stronger in case of disappointing data.
Technical analysis
The EUR/USD closed above 7-day exponential moving average (1.0582) yesterday, which is an important bullish signal. The next resistance level is 1.0640 high on March 6. This level is also 38.2% fibo of January-February rise. Breaking above this resistance may open the way for stronger EUR/USD recovery.
Trading strategy
We stay long for 1.0820. Hawkish shift in ECB statement may weigh on market in the coming days, , while Fed hike in March has been already priced in.
GrowthAces.com - Daily Forex Trading Strategies
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