Talking Forex Daily Wrap - 05/03/15

Latest CPI forecasts suggest near 2% inflation will not be reached heading into 2017 therefore potentially leaving the door open to QE continuing past September 2016

Today’s session kicked off with a quiet start in FX markets with many participants waiting on the side-lines ahead of this afternoon’s ECB press conference. With no major macro news, USD continued to reside around 11 and a half year highs during the European morning, with USD/JPY breaking above the 120.00 handle where a large option (USD 3bln) expired at the New York cut. Heading into the ECB Press conference the pair went on to break above Tuesday’s high of 120.27, while after the 10am NY cut the pair sustained gains above the 120.00 level.

The main event of the day saw ECB president Draghi address the market after rates were kept on hold as expected by all surveyed analysts. The press conference originally saw a bid in EUR/USD after optimistic rhetoric from the central bank president and discussion of better than expected GDP, however this strength was short lived, with the release of CPI forecasts (2015 inflation at 0.0% from previous 0.7%, 2016 inflation at 1.5% from previous 1.3% and 2017 inflation at 1.8%) showing a less optimistic prediction as the key `near 2%` target appears out of reach until after the scheduled end of QE. This led to the impression that monetary policy could remain accommodating for longer than previously thought, with QE potentially continuing past September 2016, thereby seeing fresh 11 and half year lows in EUR/USD, with the pair testing the 1.10 handle but failing to break below, seeing the greenback print fresh 11 year highs of its own, while below expectation US Factory Orders (-0.2% vs. Exp. 0.2%, Prev. -3.4%, Rev. -3.5%) failed to impact the USD.

Antipodean currencies both weakened during the European session, with AUD/USD coming off its overnight highs, which came after RBA Deputy Governor Lowe deviated from the RBA’s usual jawboning by saying AUD was still high given state of the economy but closer to where it needs to be. NZD/USD also trended lower during the European session in line with moves from overnight, with the RBNZ said to be consulting on property investor loans, which led to speculation that it could open the door to RBNZ rate cuts.

Looking ahead, tomorrow sees tier 1 data out of the US in the form of the Nonfarm payrolls report, with Fed’s Williams (Voter, Dove) and Fisher (Non-Voter, Hawk). Prior to that, the European morning sees German factory orders and Eurozone GDP.