Both EUR and GBP remained fairly resilient against the USD and the apparent driver seems to be investors’ growing belief that neither the ECB nor the BoE are likely to announce aggressive easing anytime soon. Indeed, the latest EUR resilience comes on the back of indications that Germany, long one of the fiercest critics of the ECB’s unconventional policy, has become even more vocal in its rebuttal of further easing. In particular, the German Finance Minister Schaeuble has recently demanded a meeting with the ECB President to discuss the impact of bank’s policies in boosting the support for anti-EUR, fringe parties like AFD. All that is expected to limit the scope for further aggressive easing when the Governing Council meets on April 21.
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A closer look at measures of ECB’s rate expectations like the EONIA 1y1y forward rate, which has recently dropped yet again, is not supporting the above conjecture, however. In addition, measures of inflation expectations in the Eurozone remain very depressed. In this regard, we think that while the final German inflation data today and the final Eurozone inflation data on Thursday need not offer significant surprises, we would still think that the Governing Council should continue to worry about and consider measures to fight the persistent disinflation risks in the economy. Given the ECB’s independence and the fact that low inflation falls squarely into the bank’s remit, there is little that Finance Minister Schaeuble can do to stop further easing by the ECB. We think that the upside in EUR-crosses and especially EUR/USD could remain rather limited.
Worth highlighting in this respect that we expect encouraging US retail sales data on Wednesday as well as resilient core CPI on Friday. The releases should highlight that a lot of negatives are in the USD-price by now. Better US data from here could pave the way for USD towards consolidation.
Turning to GBP, markets still seem to follow closely the evolution of the voters’ intentions ahead of the EU referendum. With recent polls not showing any significant new developments, factors like positioning as well as the near-term outlook for the BoE are starting to play a somewhat greater role. Starting with the latter, we note that rate expectations have moved up slightly in part on the back of expectations that the sharp GBP-selloff will boost the outlook for headline inflation before long.
One factor that could continue to support GBP for now should be market positioning. As highlighted in our recent positioning update, GBP shorts have hit yet another record low suggesting that a lot of negatives are already in the price of the currency. Indeed, GBP is starting to look oversold especially if you believe that Brexit will be avoided. Against this background any positive surprises from the UK inflation release could help the pound consolidate broadly. The gains will likely be fleeting, however, and cautiousness should reinstate itself ahead of the BoE meeting. If anything, we think that any bullish view maybe better expressed against EUR than USD.
