Can the euro still recover from being the worst-performing currency last week? And what will the SNB bring for the franc? Here’s what you should watch out for.
Draghi’s speeches (June 18, 19 and 20)
Yep, that’s three testimonies from the main man himself! Euro bulls may have shrugged off Draghi’s relatively optimistic tune during last week’s ECB presser, but he could have more chances to lift the mood this time.
Recall that Draghi highlighted how the dip in growth may be due to temporary factors and that inflation could see more upside thanks to the surge in crude oil.
Then again, Draghi tempered this positive outlook by citing that QE could remain in their monetary policy toolbox for use later on if needed while also being dodgy about the timing of rate hikes.
With that, the tone of his speeches could make or break the euro’s post-ECB slide as cautious remarks could continue to undermine tightening expectations.
SNB decision (June 21, 7:30 am GMT)
The Swiss franc may have gotten used to simply acting as a counter currency or safe-haven alternative, but the focus could shift back to its fundamentals with the SNB decision coming up.
No actual rate changes are expected, but I wouldn’t count out any potential surprises from SNB head Jordan and his buddies. Besides, any changes in their inflation outlook and their assessment of euro weakness could still keep intervention jitters in place.
Last Week’s Price Review
The euro is the third worst-performing currency of the week (as of 1 pm GMT), and euro bulls can blame (while euro bears can thank) the ECB statement for that.
The euro actually traded roughly sideways ahead of the ECB statement. Buyers were initially winning out, though, since most EUR pairs traded above last week’s closing prices (dashed horizontal line).
That’s not surprising, I suppose. After all, the euro likely got a bullish boost because of Italian Economy Minister Giovanni Tria’s comment over the weekend that Italy will not be leaving the euro.
Also, a bunch of ECB officials heavily implied last week that the ECB will announce an end to its QE program, which caused the euro to surge back then and likely continued to fuel demand for the euro ahead of the ECB statement.
And if y’all can still recall, ECB Chief Economist Peter Praet had this to say last week, which confirmed an earlier Bloomberg report that claimed that the ECB will likely discuss an end to its QE program during the ECB meeting.:
“Next week, the Governing Council will have to assess whether progress so far has been sufficient to warrant a gradual unwinding of our net purchases.”
And as it turns out, the ECB maintained its current monetary but announced that the ECB’s QE program will continue at a tapered pace of €15 billion per month until December and “will then end.”
Here’s an actual quote from the ECB’s official press statement (emphasis mine).
“The Governing Council anticipates that, after September 2018, subject to incoming data confirming the Governing Council’s medium-term inflation outlook, the monthly pace of the net asset purchases will be reduced to €15 billion until the end of December 2018 and that net purchases will then end.”
The good news that QE will finally end caused the euro to spike higher as a knee-jerk reaction. However, bears quickly attacked and roasted the bulls for dinner.
That may seem like a wonky reaction, but as explained in Thursday’s London session recap, traders were very likely disappointed with the ECB’s forward guidance on interest rates, namely the following (emphasis mine):
“The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path.”
You see, the market has already priced in a June 2019 rate hike, according to market analysts. However, the ECB is stating here that rates ain’t moving “at least through the summer of 2019.” which means that the ECB won’t consider hiking until the October 2019 ECB statement (at the earliest). And that apparently disappointed a lot of rate hike junkies who responded by dumping the euro really hard.
Also, I noted earlier that the euro surged last week because of heavy hints from ECB officials that the ECB may announce an end to its QE program. It’s therefore also likely that a “buy the rumor, sell the news” scenario played out since an end to the ECB’s QE program was already widely-anticipated.
Anyhow, the euro eventually found support and even began tilting to the upside during Friday’s London session. There were no positive catalysts, though, so that may have been just due to short-covering.
However, I also noted in Friday’s London session recap that some market analysts were saying that banks have supposedly finished pricing in the ECB’s forward guidance on interest rates.
The Swiss Franc
The Swissy and the euro are on opposite side again this week since the euro is a net loser while the Swissy is mixed but a net winner (as of 1 pm GMT).
Like the euro, the Swissy was also trading sideways for the most part. And also like the euro, the Swissy plunged in the wake of the ECB statement.
The Swissy fared better than the euro, though. And looking at the sample pairs below, we can see that the EUR and CHF pairs had roughly similar price action but the Swissy didn’t weaken as much as the euro because of the ECB statement.
And interestingly enough, the euro actually fared better than the Swissy at the start, likely because of preemptive positioning on the euro and/or relief because of Italian Economy Minister Giovanni Tria’s comment over the weekend that Italy will not be leaving the euro.