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Funda-FX wrap:  Central Bank chatter drives the euro

Funda-FX today was lacking anything significant in the way of data and instead, we heard from a number of Central Bank members.  

In the European session, first up, the euro found support on the statements of the ECB’s Villeroy. Villeroy sees rates staying low past QE for “at least some quarters, but not years” saying that the end of QE was near after which the ECB will give guidance on hikes. He also said that it was not an issue if QE ends in September or December. EUR/USD moved up to 1.1997 but in the absence of data, the 200-D SMA at 1.2020 and offers sighted below that kept the bulls in check.  

Separately, we had ECB Chief Economist Praet saying that the recent slowdown was influenced by transitory factors. Then, for the NY session, ECB’s Coeure spoke when making a speech on ‘The Future Of Central Bank Money’, and, in contradiction to his colleagues, he said that the governing council sees rates at present levels for extended period of time, well past the horizon of net asset purchases, adding, and that “the excess cash the ECB created could backfire.” The euro dropped back to the 100-hr SMA at the same time the dollar was catching a bid across the board.  

Across the pond, Fed’s Mester said that the Fed should continue to increase interest rates gradually, given inflation has not reached the bank’s target in a sustained way:

“In my view, the medium-run outlook supports the continued gradual removal of policy accommodation; it seems the best strategy for balancing the risks to both of our policy goals and avoiding a build-up of financial stability risks”.  

Analysts at ANZ noted that Mester doesn’t see inflation picking up sharply, and indicated it will take a year or two before inflation is at 2% in a sustainable way: “The Fed expects to hike two more times this year, with markets pricing in 24bps for the June meeting,” – analysts at ANZ.

We also heard from Fed’s Bullard who said that the U.S. yield curve might invert by early 2019 and that cryptocurrencies are only adding to a “tangled market.”

Away from Central Bank themes, Brexit is dragging its heels and was called out as so by the EU. There is also tension building up in Gaza as U.S. Embassy opens in Jerusalem – Israeli forces kill dozens in Gaza.  

In respect to US/China relation on trade, there was a positive article in the WSJ published that states that the U.S. and China are ‘closing in on a deal that would give China’s ZTE Corp. a reprieve from potentially crippling U.S. sanctions in exchange for Beijing removing tariffs on billions of dollars of U.S. agricultural products, said people in both countries briefed on the deal.’

FundaFX headlines, (Source LiveSquawk):

  • Fed’s Bullard: risk of inverted yield curve in 2018, early-2019.
  • ECB policymakers stick to upbeat narrative despite slowdown.
  • ECB’s Coeure: ECB says the excess cash it created could backfire.
  • Incoming ECB’s Rehn: s-term indicators suggests pace of growth has cooled.
  • US, China discussing deal on ZTE, agricultural tariffs.
  • Italy’s 5-star leader: needs more time to finalize government deal.
  • Italian CDs hit highest in nearly 4 weeks as 5-star, league near deal.
  • EU’s Barnier: not much progress made in Brexit talk since last leaders meeting.
  • UK PM May meets tory backbenchers to find a way through Brexit impasse.
  • IMF sounds warning on Irish property MKT, says growth prospects are ‘strong’.
  • Germany pledges to boost defence spending.
  • – NY Fed april survey of consumer expectations shows rising inflation Expectations.

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