Macroeconomic overview
The EUR/USD held under 1.0800 for a second day on Thursday as investors awaited a vote on Republican healthcare plans seen as a litmus test of President Donald Trump’s ability to legislate in Congress.
Dallas Federal Reserve Bank President Robert Kaplan said the Federal Reserve should raise interest rates two more times this year and continue work on a plan to gradually trim its massive balance sheet. “We are still accommodative and I think it’s very appropriate for us to be accommodative,” he said. If inflation rises above the Fed’s 2% target for a brief period, it is not going trigger faster rate hikes as long as it is not a persistent trend, he said.
Kaplan also said he is “mindful” that some of the policies expected under President Donald Trump’s new administration, including changes to immigration and trade policies and changes to health insurance, could slow economic growth or hurt consumer spending. He and his staff have been trying to figure out why some of the latest readings on consumer spending already suggest some sluggishness, and will keep a close eye on those figures going forward.
But, he said, he will not be factoring in impacts from Trump’s new policies, including those like tax reform that may boost growth, until he is pretty sure they will be enacted.
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The final of the ECB’s TLTRO2 operations will be conducted today and while the consensus sits around EUR 110-125 billion. Theoretically demand can be above EUR 1 trillion. There are two factors which suggest an above consensus outcome. First, it is the final opportunity to secure cheap 4-year funding, and second, the backdrop of rate ECB hike/exit expectations. This suggests to us that demand will be higher than consensus, and we are looking for an allocation of around EUR 150 billion. Clearly the bigger market impact will come from an above consensus outcome for TLTRO2 as this will increase the overall thrust of monetary stimulus and thus act as an added encouragement to exit what is currently an emergency policy setting.
We are likely to see the first stage of this exit plan in action at the June meeting when we expect the ECB to drop the reference to “or lower” on its rate guidance. It won’t be until after the September German election that we see phase two of the exit with a signal at the October meeting that QE will be tapered starting from the beginning of 2018.
We look for QE to be tapered at a rate of EUR 15 billion at every meeting. The risk is that QE will be tapered at a much slower pace and a rate hike will be delivered during this time.
Technical analysis
The EUR/USD remains above positively-aligned 7-day exponential moving average, which highlights the bullish structure. The EUR/USD has already tried twice to break above the 38.2% fibo of 1.1616-1.0340 move – in February and yesterday, but the resistance is still too strong. A close above this level would open the way to 1.0976, 50% fibo of that move.
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