Draghi and the EUR in Focus, with Half an Eye on the Dollar

Market focus will shift temporarily to Europe this afternoon, with the ECB interest rate decision and, more importantly, Draghi press conference scheduled.

The relief rally stemming from Macron’s first round victory has come and gone, with European equities kicking off the day under pressure with the CAC down 0.34% at the time of the report, closely followed by the DAX, down 0.28%, as concerns begin to weigh over a possible shift in the ECB’s outlook on monetary policy over the near-term.

Inflationary pressures may have eased back, with headline inflation sitting short of the ECB’s target, following the overshoot back in February, but with the geo-political risk storm now largely tempered, with the German election later in the year expected to be far more straightforward, as far as the Establishment is concerned.

With populist parties now back in the shadows, the door has certainly been left ajar for Draghi and the team to begin considering whether a tapering to the asset purchase program and perhaps even a rate cut, the noise beginning to circulate on the various options available to the ECB.

This evening’s press conference will provide Draghi with the first opportunity to bask in the glory of the Establishment and perhaps take a more hawkish stance on the Eurozone economy and outlook for growth, such a stance likely to lead the markets to begin considering a shift in the ECB’s outlook on monetary policy over the near-term, Draghi having previously stated that monetary policy would remain extremely accommodative through to the end of the year.

All things considered, the EUR still looks relatively cheap against the Dollar when considering the fact that monetary policy divergence is likely to be in favour of the EUR through to the end of the year, with the FED’s rate path projection having been largely priced in. The French Election result will likely give the EUR a second nudge come 7^th May, the possibility of surprise Le Pen victory still an itch for the markets to scratch.

Draghi has recently had a dragging effect on the EUR, but with economic indicators continuing to show the Eurozone economy on an improving path, it’s only a matter of time.

At the time of the report, the EUR has managed to recover from an intraday low $1.0896 to $1.09063, as the EUR continues to find support from the election outcome, while the uncertainty over Draghi’s comments this afternoon will likely be a drag.

Economic data out of the Eurozone this morning included May consumer confidence figures out of Germany, which was EUR positive, the GfK Consumer Climate Index rising to 10.2, coming in ahead of a forecasted and April 9.9, with Spain’s annual rate of inflation also accelerating in April, according to prelim figures.

Over in the U.S, Trump’s tax reforms, which were rolled out on Wednesday, failed to drive the Dollar, with the Dollar Spot Index on the back foot through the early part of the day, down 0.11% at 98.935 at the time of the report. The lack of details will leave the markets hanging through the coming weeks as the markets search for a multitude of answers, the U.S administration showing yet again the lack of experience at the top, something that will certainly need to improve should Trump and the team have any desire of successfully passing campaign pledges through the House.

The overnight flip flopping on NAFTA added to the Dollar’s woes, the mixed messaging from the Oval Office certainly not something that is well received by the markets.

The lack of details suggests that the roll out of a fiscal stimulus package will be pushed back further, suggesting that the current rate path projection remains appropriate, particularly with recent economic indicators out of the U.S having given mixed signals on the outlook for the U.S economy.

Dollar weakness will likely persist through to the U.S session with macroeconomic data out of the U.S including March’s pending home sales, durable goods orders and goods trade balance figures, together with the weekly jobless claims numbers. We will expect the figures to add further pressure on the Dollar, should the stats be in line with or weaker than forecast, with appetite for the Dollar on the decline for now.