Draghi and Carney Place the EUR and GBP in the Spotlight, with the USD on the Ropes

The Dollar Spot Index may have looked as though it was on for a rebound through the early part of the Asian session today, but Tuesday’s events and reports were ultimately a burden too heavy to bare, with not only the IMF’s seemingly more aligned with the markets than the FED on the outlook for the U.S economy weighing, but also the U.S administration’s failings to pass through the Healthcare Bill, evidence once more that Trump and the administration have done little since January to restore party unity in support of ‘making America great again.’

Draghi has ultimately brought down the Dollar Spot Index, with the EUR having the largest weighting and it looks unlikely for the EUR to be giving up Tuesday’s gains anytime soon, barring an economic meltdown, with the FED’s lower and slower monetary policy mantra now largely priced in, while the EUR continues to look relatively cheap against the Dollar, when factoring in monetary policy divergence in its favour.

We will have further commentary from the ECB president this afternoon, with Tuesday’s hawkish commentary having been given the backing of ECB’s Constancio, Constancio noting that Draghi’s comments were in line with ECB policy. Draghi will be joined by BoE Governor Carney and BoJ Governor Kuroda amongst other central bank heads, though the day ahead will unlikely see the EUR change course, Draghi’s hawkish sentiment expected to last for a few weeks at least…

Macroeconomic data out of the Eurozone this morning is on the lighter side, limited to June prelim inflation figures out of Italy. The calendar may be light, but it will likely pack a punch as the markets look for any signs of an acceleration in inflation that could push the ECB to bring forward it’s now widely expected shift towards normalization, the pace of any rate hikes and tapering to the asset purchasing program linked more to inflation than other economic indicators that fall outside of the ECB’s objective.

A pickup in inflation, in line with or better than forecast this morning, will provide the EUR with further upside, with $1.14 levels certainly within range by the end of the week should an acceleration in inflation be more broad based across the Eurozone.

At the time of the report, the EUR was up 0.16% at $1.13574, though we expect any further gains to be on hold ahead of this morning’s data, with the markets likely to be a little cautious going into this afternoon’s central bank speeches.

Across La Manche, there are no material stats for the markets to focus on through the day, with Carney’s speech at the ECB forum this afternoon the main event for the pound. The pound has found some support from the lack of traumatic news out of Brussels or Westminster, with Carney holding back from any dovish commentary on Tuesday an added bonus for the bulls.

Things could be different today at the ECB Forum however, with Carney able to discuss a variety of issues, including monetary policy, the recent increase in dissent within the ranks of the MPC and what lies ahead vis-à-vis Brexit, and the UK economy. Should the BoE Governor follow in Draghi’s footsteps, we can expect the pound to hold on to the recent gains, whilst silence will be considered a status quo from a Carney monetary policy outlook perspective, which would be a negative for the pound and will likely lead to the pound pulling back to this week’s lower levels.

It certainly makes for an interesting day ahead, with the unpredictability of both Draghi and Carney continuing to have the markets guessing for a 2^nd consecutive day, with Brexit negotiations going on in the background another factor for consideration, any curveballs from Brussels certainly capable of overshadowing the BoE Governor.

Across the pond, macroeconomic data out of the U.S is limited to May pending home sales figures, which are forecasted to be positive, but unlikely to ease the Dollar’s pain, the markets now looking to see how the administration will respond to Tuesday’s failings, together with any reasons why the FED will need to pull back on a final rate hike of the year between now and December.

A pickup in consumer confidence in June was good news for the Dollar, but a weaker expectations index could lead to consumers tightening the purse strings further, which would round off a poor quarter on the household spending front and weigh on growth expectations through the quarter and the 2^nd half of the year.

At the time of the report, cable was down 0.11% at $1.27997, the pound having given up intraday gains ahead of Carney speaking, with Carney expected to maintain his dovish outlook on the economy and monetary policy. Any pause in either the EUR or the GBP expected to provide some respite for the Dollar ahead of today’s main events, though it’s going to be hard for the momentum to shift the Dollar Spot Index down just 0.01% at 96.385 going into the European session, the index recovering from an intraday low 96.273, with more downward movements likely through the day.