Mario Draghi has come out to suppress any rate hike expectations signalling that the European Central Bank (ECB) will hold rates until there is a material rise in wage growth and inflation. Economic data since the last meeting has shown strong signs of growth but ECB council members have expressed concern over whether the upward trend in inflation is sustainable or is being fuelled by loose monetary policy. We expect the ECB to maintain its forward guidance on rates and do not expect any reassessment of policy until the June meeting when the ECB will release its projections.
Markets interpreted the March meeting as hawkish giving more weight to 1) uptick in growth and inflation forecasts, 2) Draghi’s comments on changes to the statement, than to 3) Draghi’s remarks asserting the current policy stance. We do not expect to see a similar reaction as the ECB take a back seat to the French elections.
Markets will be focusing on forward guidance. We expect there to be no changes due to muted core inflation, political uncertainty and our view that ECB policy will cater for the weakest link. It is also highly unlikely the ECB will hike interest rates, as that would be counter-productive while they are still expanding their monetary base.
Net euro positioning is close to zero. EURUSD has broken key resistance levels but we believe it will struggle to close above 1.10. We are structurally bearish EURUSD given our view monetary and financial conditions within the EMU should diverge pushing growth differentials further apart. We do not expect to see another hawkish market reaction at the upcoming ECB meeting.
Short EURGBP is our preferred market to hedge upcoming political risk in Europe. However, markets have respected the key 0.83 support level and have been trading up at our change of trend resistance level. Our bias is for a lower EURGBP and would use resistance levels as an opportunity to enter small short positions.
EURAUD has rallied through 1.4467. We maintain our bearish AUD view as we see the RBA keeping policy unchanged as they cater for a weak labour market and a hot housing market. We like short AUD and see this break of resistance as an indication that a base has been established.