Will Draghi Challenge EUR Strength?

Forex News and Events:

The BoE and the ECB give policy verdict today. The BoE is highly expected to keep the bank rate unchanged at the historical low of 0.50% despite opposition from the markets. We believe that the supportive economic data, good PMI readings and the significant improvement in labor market still keep the bets in line with an earlier-than-planned policy normalization in UK, thus supportive of higher sterling. The BoE status quo should remain a non-event today suggesting that the GBP/USD should continue trading on techs. EUR/GBP however should be dominated by the EUR-leg as the situation in Frankfurt is slightly more complex. How will the ECB react to relentless EUR strength?

Will the strong EUR result in concrete ECB action?

The expectations on ECB are mixed. The official consensus is the status quo with the main refi rate stable at 0.25%, the deposit/marginal lending corridor at 0.00%/0.75% and a dovish accompanying statement out of Draghi’s press conference. We expect Draghi to explicitly express dissatisfaction on high EUR/USD levels. Yet this is already priced in and should not damage any significant levels on the downside in lack of concrete action. ECB’s verbal interventions have decreasing marginal impact on the FX markets; ECB’s lethargy has only strengthened the bullish EUR views. Especially due to downside pressures in Euro-zone’s price dynamics.

In fact, we believe that the slight recovery in April’s headline CPI estimate (from 0.5% to 0.7%) and the supportive PMI numbers give good reason to ECB to not act at today’s meeting. On the option markets, we notice significantly lower EUR/USD short positions for today expiry. Option related offers are slightly dominant below the 1.3900 hurdle, yet the sentiment remains mixed above April 12^th reaction low of 1.3775. A dovish statement alone should only trigger dip-buying opportunities targeting a bounce back to the key 1.3967-resistance.

This said, the possibility of looser ECB policy cannot be totally ruled out. On his April 12^th speech, the ECB President Draghi has clearly stated that the strong EUR will trigger a looser monetary policy. Should the ECB decide to take a step today, the action tools available are a potential main refi and/or deposit rate cut (likely 15bn and 10bp cuts respectively), a Fed-like QE or LTROs. We see little probability of concrete action before June revision on economic outlook. Yet unexpected action seems to be the only way to encourage a maintainable EUR downtrend.

Swiss prices remain subdued

The Swiss inflation remains horizontal in April. Food and non-alcoholic beverages cheapened by 0.6% month-on-month, while the communication sector, restaurants and hotels proposed lower prices over the past month. The Swiss headline CPI remained flat (0.00%) on yearly basis. The housing costs are still amongst the faster growing expenses of a standard Swiss consumer basket.

The soft inflation figures clearly give flexibility to SNB to keep in place the loose policy and so to avoid excessive CHF strengthening in today’s risk environment. USD/CHF consolidates losses below the 21-dma (0.8801), while EUR/CHF challenges the 21-dma (1.21889) on the upside. Swiss franc should take a breather as Ukrainian tensions seem to ease on Vladimir Putin’s seemingly softening position.

The Risk Today:

EUR/USD has thus far failed to break the key resistance at 1.3967. However, the short-term technical structure is positive as long as the support at 1.3865 (05/05/2014 low, see also the rising channel) holds. An initial support lies at 1.3906 (11/04/2014 high). Today's ECB meeting should increase intraday's volatility. In the longer term, EUR/USD is still in a succession of higher highs and higher lows. However, the recent marginal new highs (suggesting a potential long-term rising wedge) indicate an exhausted rise. As a result, we see a medium-term limited upside potential, especially given the key resistance at 1.3967 (13/03/2014 high) and the increasing overbought conditions.

GBP/USD continues to be supported by a solid buying interest and is now challenging the major resistance at 1.7043. Hourly supports stand at 1.6920 (01/05/2014 high) and 1.6823 (02/05/2014 low). In the longer term, prices continue to move in a rising channel. As a result, a bullish bias remains favoured as long as the support at 1.6661 (15/04/2014 low) holds. However, we are reluctant to suggest an upside potential higher than the major resistance at 1.7043 (05/08/2009 high), especially given the general overbought conditions. Another resistance can be found at 1.7332 (50% retracement of the 2007-2009 decline).

USD/JPY has recently drifted lower. However, prices are now approaching a key support area between 101.20 (03/03/2014 low) and 100.76 (see also the 200 day moving average and the rising channel). An hourly resistance stands at 102.19 (06/05/2014 high). Another resistance lies at 103.02. A long-term bullish bias is favoured as long as the key support 99.57 (19/11/2013 low) holds. Monitor the support area provided by the 200 day moving average (around 101.06) and the rising trendline from the 93.79 low (13/06/2013). A major resistance stands at 110.66 (15/08/2008 high).

USD/CHF bounced yesterday. However, prices have thus far failed to break the initial resistance at 0.8765 (05/05/2014 low). Another hourly resistance lies at 0.8784. A key support can be found at 0.8699. From a longer term perspective, the structure present since 0.9972 (24/07/2012) is seen as a large corrective phase. However, a decisive break of the key resistance at 0.8930/0.8953 is needed to validate a bullish reversal pattern.