Daily Commentary | 17/03/2017
Euro surges again as ECB’s Nowotny hints at rate hikes
The common currency enjoyed another round of increased demand yesterday, following some comments from Ewald Nowotny, the Austrian ECB Governing Council member. The policymaker said that when the time comes, the ECB would not have to increase all three of its interest rates simultaneously, nor to the same extent, and indicated that the deposit rate could be raised before the other two. He further added that the Bank will decide at a later time whether it will raise rates before, or after it ends its QE program. Although he did not directly indicate any timeline or anything more specific with regards to policy normalization, just the fact that there is discussion around this topic was enough to cause EUR/USD to resume its latest rally. The pair was resting near the 1.0710 (S2) level ahead of Nowotny’s comments and surged on his remarks to break above the resistance (now turned into support) barrier of 1.0755 (S1). The short-term bias remains positive and as such we expect the rate to challenge the very important territory of 1.0800 (R1) soon, if not today.
Given that core inflation has not begun to accelerate yet, we consider it far too early to be discussing when the ECB may actually begin to normalize. However, should the subject of normalization continue to gain attention, the euro is likely to remain supported, we think. Having said that, we still have the French elections ahead of us and the risk of Le Pen being elected. As we approach the Election Day, we see the possibility for the common currency to correct lower in case Le Pen starts to gain back ground in the polls. From a technical standpoint, although the short-term picture looks positive, we would like to see a clear close above 1.0800 (R1) and the downtrend line taken from the peak of the 3rd of May before we get confident on larger bullish extensions. Such a break would signal the completion of an inverted head and shoulders formation and in combination with a potential defeat of Le Pen, it could lead to a medium-term trend reversal.
Bank of England remains on hold, but adds a hawkish touch The Bank of England kept its stimulus program unchanged yesterday via a 8-1 vote, against the consensus of doing so unanimously. The dissenter was Kristin Forbes, who favored for a hike, as in her view inflation was rising quickly and the pre-referendum concerns about a potential slowdown in growth had not materialized. Her dissent sent sterling higher immediately, but that was not all for GBP. The currency extended its gains as market participants scrolled through the meeting minutes and found more hawkish signals. The minutes showed that “some members” would consider a reduction in monetary stimulus, should there be any further upside news on the prospects for growth or inflation. This is a considerable shift in rhetoric from the MPC, who until the latest meeting indicated that most members remain willing to look-through above target inflation. GBP/USD shot up from 1.2245 (S2), broke the resistance (now turned into support) of 1.2300 (S1), and hit the 1.2375 (R1) barrier. We expect the pound to continue trading higher for a while, and if the bulls are strong enough to overcome the 1.2375 (R1) resistance, then we may see a test near the downside resistance line taken from the peak of the 2nd of February, or near the 1.2470 (R2) zone. In our view, a clearing of these resistance territories is possible to carry larger upside extensions, given that the latest rebound came from near the lower bound of a medium-term sideways range that has been containing the price action since the 7th of October, between 1.2100 and 1.2850.
Now with regards to the future gatherings of the Bank, yesterday’s undeniably hawkish signals suggest that as UK inflation accelerates further, we are likely to get more dissenters in coming months, assuming that economic growth remains robust. Something like that could offset some of the downward pressure on sterling that might result from the Brexit negotiations should the UK government continue to pursue a “hard Brexit”. Having said that, though, we are skeptical as to whether we will actually see a BoE rate hike in the near-term, mainly because the Bank is unlikely to rush into monetary tightening before the Brexit negotiating landscape becomes clearer. What’s more, the phrase that “some members” would consider a reduction in stimulus carries considerable uncertainty, because it could mean anything from 2-4 MPC members, which is still a minority. Finally, Kristin Forbes, who dissented this decision and is an outspoken policy hawk, will leave the Committee in June. This suggests that the camp within the MPC that could vote for a hike is likely to lose a member unless her replacement is equally hawkish.
SNB stands pat, reiterates CHF is overvalued The Swiss National Bank remained on hold as well yesterday. Even though the Bank indicated that the outlook for Switzerland’s economy is cautiously optimistic, it reiterated for the umpteenth time that the franc remains significantly overvalued and that the Bank will remain active in the FX market as necessary to curb gains in the currency.
Norges Bank shifts to a slightly more dovish tone The Norges Bank took no action either yesterday. NOK came under selling interest on the decision, as the Bank shifted to a somewhat more dovish bias in our view, indicating in the first sentence of the statement that there are prospects that inflation will be lower than expected earlier. Nonetheless, the Bank reiterated the financial stability risks that further easing could pose, making the overall tone of the statement appear more balanced. Although we don’t actually expect a rate cut by the Bank in the foreseeable future, given these cautious signals on policy, and the fact that oil prices have declined recently, we believe that the Krone could remain on the back foot for a while.
Today’s highlights: During the European day, we have a relatively light data calendar. The only noteworthy economic indicator we get is Eurozone’s trade balance for January, though no forecast is available.
In the US, industrial production for February is due out and expectations are for a rebound in the figure. The preliminary U of M consumer sentiment index for March is coming out as well and the forecast is for an increase.
As for the rest of the economic events, the G20 Central Bank Governors and Finance Ministers will meet in the German town of Baden-Baden. The market focus will probably be on the language the G20 use with regards to free trade as well as currency manipulation, in light of US President Trump’s rhetoric for increased protectionism and taking action against countries who, according to him, devalue their currencies.
• Support: 1.0755 (S1), 1.0710 (S2), 1.0675 (S3)
• Resistance: 1.0800 (R1), 1.0830 (R2), 1.0875 (R3)
• Support: 1.2300 (S1), 1.2245 (S2), 1.2190 (S3)
• Resistance: 1.2375 (R1), 1.2470 (R2), 1.2525 (R3)