The ECB shortly announces their interest rate decision and it is expected to leave unchanged, having announced further stimulus measures only last month. Focus will be on the press conference with President Draghi and whether he will sound more dovish than last month when he appeared to signal a floor in interest rates.
Markets will also be looking for more information on the ECB’s corporate bond purchases which are due to start towards the end of Q2, although it is not clear that details will be provided today.
As strong EUR appreciation would be a direct threat to the ECB’s inflation mandate in the short term, our view is that Draghi will probably re-open the door to further rate cuts at the April meeting, though we do not expect any actual cuts to materialise at the meeting.
Relative rates and ‘Brexit’ risk premium set to limit short-term EUR/USD upside At the ECB’s latest monetary policy meeting, central bank president Mario Draghi indicated that the prospects for further rate cuts were modest. The market reacted strongly to this statement and the EUR immediately strengthened.
On the flip side, Fed’s communication on the outlook for further rate hikes has been very dovish since March. With the prospect of monetary policy tightening being postponed, the USD has weakened and risk assets have generally performed decently after the selloff in January and February.
The recent fall in US yields appears slightly overdone, in our view, as the market is not pricing the next rate hike until summer 2017 – yet the US labour market still looks robust, which combined with solid private consumption indicates underlying inflation pressures are still respectable from a growth perspective.
Moreover, recent movements in US yields, USD, credit spreads and the equity market mean financial conditions in the US are, more accommodative than prior to December’s rate hike. Fed will most likely be dovish in our view, but we expect the Fed to deliver one rate hike in 2016, probably in September.
We therefore expect EUR/USD to trade in the 1.1100 to 1.1450 range on a 3M horizon. We still find it unlikely that EUR/USD would fall to a new record low during the current economic cycle – even in the event of Brexit. Our EUR/USD forecast is 1.12 on both a 1M and a 3M horizon.
