BOJ and ECB expected to stand pat despite improving economic indicators
The USD is higher across the board on Wednesday after U.S. Treasury Secretary Steve Mnuchin and Chief Economic Adviser Gary Cohn presented the outline of the Trump tax reform. Billed as the biggest tax cut in U.S. history its main goal is to unlock growth.
The Trump administration had squandered its honeymoon period in Washington by introducing controversial policies on immigration and healthcare instead of the pro-growth reforms signalled right after Trump was victorious in the November elections. A return to pushing those policies could spark the return of the reflation trade, also known as the Trump trade.
The Bank of Japan (BOJ) will publish its Monetary Policy Statement on Wednesday, April 26 at 11:30 pm EDT. The central bank is not likely to update its policy during the April meeting. BOJ Governor Haruhiko Kuroda said on April 20 that the current quantitive easing (QE) program would remain in place for some time. The strength of the JPY has been an obstacle in reaching the central bank’s goal of 2 percent inflation. The BOJ is expected to lower its inflation forecast and upgrade its economic growth outlook.
The European Central Bank (ECB) will release its minimum bid rate on Thursday, April 27 at 7:45 am EDT. ECB President Mario Draghi was active last week talking down a premature tapering as there remain multiple downsides risks to the economy.
The market was optimistic after the results of the first round of presidential elections in France. With a Macron and Le Pen second round the worst case scenario was avoided and the EUR rose but until May 7 there are still a lot that could change despite the polls pointing to a healthy Macron lead. After the results of Brexit and the U.S. elections polls do not command the same trust that they used to.
The EUR/USD lost 0.378 percent in the last 24 hours. The single currency is trading at 1.0895 after the Trump administration got back on track with their pro-growth policies. Too early to call the return of the Trump trade, specially with a possible disappointment on Friday as the first estimate of the Q1 GDP will be released.
European economic indicators have been light this week. The German Ifo business climate index rose to 112.9 a six year high as executives are more optimistic about the current state of the German economy. The ECB press conference will be a highlight for investors looking for insights into its QE program after it scaled it back to 60 billion euros a month (from 80 billion euros). The EUR has benefited from a reduction in risk after the first round of the French elections, but there is still more to come not only in the second round, but with the end of the two party system the parliamentary elections are now even more relevant.
The USD/JPY gained 0.232 percent on the Wednesday trading session. The pair is trading at 111.37 as the USD got a boost from the Trump administration’s announcement of its tax reform plans. The BOJ will stand pat on rates and the size of its massive QE program even as there are some positive signs of economic growth. The inflation benchmark of 2 percent remains out of reach however as the current rate hovers around 0.3 percent.
The JPY has been used as a safe haven during volatile times, working against the work of the BOJ. U.S. military actions and the French election made it a natural refuge as the USD and EUR were sold in favour of the Japanese yen. With the return of risk appetite and a reversal of fortune for the greenback it has advanced more than 2 percent against the JPY after touching weekly lows of 108.72.
Market events to watch this week:
Wednesday, April 26
11:50pm JPY Monetary Policy Statement
Thursday, April 27
Tentative JPY BOJ Outlook Report
Tentative JPY BOJ Policy Rate
2:30am JPY BOJ Press Conference
7:45am EUR Minimum Bid Rate
8:30am EUR ECB Press Conference
8:30am USD Core Durable Goods Orders m/m
8:30am USD Unemployment Claims
Friday, April 28
4:30am GBP Prelim GDP q/q
8:30am CAD GDP m/m
8:30am USD Advance GDP q/q