Draghi hints at June rate cut

The G10 FX space looks very similar to where we finished yesterday, with the only notable change being the AUD, which is trading 20 points lower. This follows the RBA’s downward revision to its inflation forecasts for December 2014 to 2.5% from a wider range of 2.25% to 3.25%. In New Zealand, RBNZ Deputy Governor Spencer expressed concerns of rising house prices and the effect this would have on consumer spending and overall demand. He said the next interest rate rise would be determined by the NZD level and house prices.

The FX market today is focused on the euro and the bearish technical picture following ECB President Mario Draghi’s inspired reversal from 1.4000. The technical picture shows a similar picture to the euro reversal of June 2013 which, if replicated, will close this week below 1.3770 points to a move to 1.3330. The opening statement from the ECB had the single currency rallying very close to the 1.4000 level as the ECB stuck to familiar lines such as ‘‘Incoming information continues to indicate that the moderate recovery of the euro area economy is proceeding in line with our previous assessment. At the same time, recent information remains consistent with our expectation of a prolonged period of low inflation followed by only a gradual upward movement in HICP inflation rate. We will maintain a high degree of monetary accommodation and act swiftly, if required, with further monetary policy easing. The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation.’ But then, in the question and answer session, Draghi delivered a line that caught everyone’s attention: ‘The ECB is dissatisfied with the low path for inflation and is comfortable in acting in June.’ This was followed with a comment on the exchange rate that many euro bulls had feared: ‘Stronger euro in current inflation context is a serious concern and concerns over FX rate will have to be addressed.’ He added that the ‘exchange rate is not a policy target.’ The June decision is data dependant, with the next HICP reading to be released on June 3rd – just two days before the next ECB meeting. The most likely policy reaction to a low print and euro level close to 1.4000 will no doubt be a further rate cut and not the implementation of QE.

The data calendar today is not too inspiring for a volatile move, with just the release of industrial production data and trade balance figures from the UK.

EUR/USD

Supports 1.3785-1.3740-1.3675 | Resistance 1.3850-1.3900-1.3925

USD/JPY

Supports 101.30-101.05-100.75 | Resistance 102.00-102.30-102.60

GBP/USD

Supports 1.6910-1.6880-1.6835 | Resistance 1.6945-1.7000-1.7040