3-course meal of ECB, Fed and Brexit is on today’s menu

April 10, 2019

GBP

It’s that time again for another awkward dinner party with Theresa May as the guest speaker, although no place is set for her at the table that she, and the UK, are desperately trying to leave. The action will begin at around 16:00 BST as EU leaders walk the carpet and speak to cameras. Commentary from vocal leaders such as Merkel and Macron will likely flash across investors screens after such point. After which, at around 17:30 BST, the EU-27 leaders will hear May’s latest plans before asking her to leave. It is unlikely that they will accept her latest proposal of a short-extension to June 30, with a delay of 12months + the likely option. This was all but confirmed in Donald Tusk’s letter last night. Also yesterday evening, a draft conclusion statement was leaked, but with the timeframe left as XXXX little new information was included. This morning, however, the pound will look towards February’s GDP release at 09:30 prior to the Article 50 summit. The next few headline growth figures may be overinflated by the effects of stockpiling; which has tainted recent production PMIs.

EUR

Volatility appeared to be on leave from the FX realm yesterday, which had all G10 currency crosses close within 50 basis points from the opening. Yesterday’s main headline for the euro was the announcement of a list of 11bn in potential sanctions that the Trump administration is threatening to impose on European imports, in retaliation for EU support for Airbus. A cut in the growth projection by the Italian government from 1.0% to 0.1% was not enough to jolt the euro into life, as reports in this direction were leaked in previous weeks, which spoiled the surprise element. However, as the lower Italian growth implies a higher fiscal deficit as well, some rabbits will definitely appear from this high hat later this year as Italy needs to get its budget approved by the European Commission. Bond markets are likely to judge these budget rabbits to be far from cute and fluffy, and the outflow of investment will drive up Italian yields and weigh on the euro. Today we have the European Central Bank Rate Announcement and Press Conference at 11:45 BST and 12:30 respectively. In these communications, the ECB may share measures that calm Italian bond markets somewhat, like the conditions attached to the Long Term Refinancing Operations for banks, which would be beneficial for Italian banks, but also weaken the euro as it implies a continued loosening of monetary policy.

USD

The dollar is trading slightly higher this morning, ahead of tonight’s potentially market-moving FOMC minutes. The Fed surprised markets with a decisive dovish shift at its last meeting – leading to a brief inversion in the US sovereign curve over the 3 month – 10 year horizon, a development that has historically preceded a recession. The development was ironic, given the FOMC changed policy to be more dovish partly in order to reassure consumers, businesses, and investors, but ended up spooking fixed income markets. The full rationale for the dovish shift, as well as the balance of opinion on the Committee, will be under close scrutiny when the minutes are released tonight at 19:00 BST. Tonight’s minutes will also be viewed in the context of renewed attacks on the Fed from the Trump administration, which in addition to the President’s now familiar calls for looser policy has recently escalated to the potential nominations of two unqualified, political appointees to the FOMC. Prior to this, the CPI measure of inflation data will be released at 13:30.

CAD

In a sharp reversal of faith, the loonie bottomed the board of major currencies yesterday after ranking among the winners the day before. The Trump Administration announcing tariffs against $11 billion worth of European goods soured risk sentiment, which wasn’t helped by lower growth projections by the International Monetary Fund either. CAD being among the most sensitive to the risk of all major currencies took the hint and subsequently sold off. Just like yesterday, today’s Canada’s domestic data calendar remains empty.

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