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Euro, Yen May Fall as Pound Gains on Confidence-Boosting ECB Tone

DailyFX.com –

The Euro may decline alongside the Japanese Yen if the ECB signals it is prepared to counter post-Brexit contagion while helping to shore up Italian banks.

Talking Points:

  • ECB rate decision unlikely to bring immediate policy stance change
  • Markets to focus on post-Brexit countermeasures, Italian bank risk
  • Euro, Yen to fall as Pound gains on confidence-boosting ECB tone

All eyes are on the ECB monetary policy announcement. Euro-area financial conditions have recovered from tightening in the run-up to the UK Brexit referendum, so further action seems unlikely at this stage. The post-meeting press conference with ECB President Mario Draghi may prove to be a major market mover however.

Investors will look to be reassured on two fronts. First, they will want the ECB to firmly establish that it has the tools to fight back if knock-on negativity following the Brexit vote intensifies, as well as a willingness to use them. Second, they will want an assurance that the Bank is prepared to support tottering Italian banks.

An undesirable side-effect of lowering borrowing costs further is that it hurts Eurozone banks’ earnings at a time when an abundance of bad debt has left Italian lenders particularly vulnerable. Indeed, shares in the country’s top financial institutions plunged after the Brexit vote, revealing traders’ concern about their viability in the event that the ECB is forced to ease further.

For its part, the central bank may be non-committal until it publishes bank stress tests for the region on July 29. In the meantime, markets will want to hear that it is prepared to back a somewhat augmented “bail-in” process that spares retail investors that own Italian bank paper from suffering large losses as part of a “precautionary” capital injection (i.e. one that doesn’t trigger bankruptcy per Eurozone rules).

If both of these conditions materialize, swelling risk appetite is likely to weigh on the Japanese Yen. It may likewise temporarily boost the typically sentiment-geared Australian and New Zealand Dollars, although follow-through seems unlikely. Both currencies have notably diverged from binary risk on/off dynamics recently amid swelling RBA and RBNZ rate cut speculation.

Interestingly, the British Pound may find broad-based strength in this scenario. A post-Brexit slowdown in the UK threatens to export weakness across the English Channel. The very same channels of transmission may echo support from an expanded ECB monetary policy cushion in the opposite direction. Needless to say however, the Euro may suffer.

The Kiwi Dollar underperformed in overnight trade after the RBNZ released a dour inter-meeting assessment of economic conditions, boosting bets on a rate cut to be announcement next month. The Yen likewise faced selling pressure as Asian shares advanced, undermining demand for the perennially anti-risk Japanese unit.

Are FXCM traders long or short EUR/USD before the ECB rate decision? Find out here!

Asia Session

GMT

CCY

EVENT

ACT

EXP

PREV

21:00

NZD

RBNZ Publishes Assessment of Economy

22:45

NZD

Net Migration SA (JUN)

5670

5560

01:00

CNY

Swift Global Payments CNY (JUN)

1.72%

1.90%

01:30

AUD

NAB Business Confidence (2Q)

2

4

01:30

AUD

RBA FX Transactions Government (JUN)

-1731m

-916m

01:30

AUD

RBA FX Transactions Market (JUN)

1720m

909m

01:30

AUD

RBA FX Transactions Other (JUN)

36m

25m

03:00

NZD

Credit Card Spending (MoM) (JUN)

-0.8%

0.1%

03:00

NZD

Credit Card Spending (YoY) (JUN)

4.1%

6.0%

04:30

JPY

All Industry Activity Index (MoM) (MAY)

-1.0%

-1.1%

0.8%

05:00

JPY

Supermarket Sales (YoY) (JUN)

-0.5%

-1.3%

06:00

JPY

Machine Tool Orders (YoY) (JUN F)

-19.9%

-19.9%

European Session

GMT

CCY

EVENT

EXP/ACT

PREV

IMPACT

06:00

CHF

Trade Balance (JUN)

3.55b (A)

3.78b

Low

06:00

CHF

Exports Real (MoM) (JUN)

-3.3% (A)

-1.0%

Low

06:00

CHF

Imports Real (MoM) (JUN)

-4.0% (A)

-0.6%

Low

07:00

CHF

Money Supply M3 (YoY) (JUN)

2.0%

Low

08:30

GBP

Retail Sales Ex Auto Fuel (MoM) (JUN)

-0.6%

1.0%

Medium

08:30

GBP

Retail Sales Ex Auto Fuel (YoY) (JUN)

4.8%

5.7%

Medium

08:30

GBP

Retail Sales Inc Auto Fuel (MoM) (JUN)

-0.6%

0.9%

Medium

08:30

GBP

Retail Sales Inc Auto Fuel (YoY) (JUN)

5.0%

6.0%

Medium

08:30

GBP

Public Finances (PSNCR) (JUN)

3.4b

Low

08:30

GBP

Central Government NCR (JUN)

6.0b

Low

08:30

GBP

Public Sector Net Borrowing (JUN)

9.2b

9.1b

Low

08:30

GBP

PSNB ex Banking Groups (JUN)

9.5b

9.7b

Low

11:45

EUR

ECB Main Refinancing Rate (JUL 21)

0.00%

0.00%

High

11:45

EUR

ECB Deposit Facility Rate (Jul 21)

-0.40%

-0.40%

High

11:45

EUR

ECB Marginal Lending Facility (JUL 21)

0.25%

0.25%

High

11:45

EUR

ECB Asset Purchase Target (JUL)

€80b

€80b

High

Critical Levels

CCY

Supp 3

Supp 2

Supp 1

Pivot Point

Res 1

Res 2

Res 3

EURUSD

1.0913

1.0961

1.0988

1.1009

1.1036

1.1057

1.1105

GBPUSD

1.2844

1.3005

1.3107

1.3166

1.3268

1.3327

1.3488

— Written by Ilya Spivak, Currency Strategist for DailyFX.com

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Euro, Yen May Fall as Pound Gains on Confidence-Boosting ECB Tone