- Today is packed with market-moving events, including an ECB meeting, an EU summit on Brexit, US inflation data, and Fed minutes
- ECB is likely to maintain a dovish tone amid growth, trade concerns
- EU set to offer UK long but ‘flexible’ Brexit extension
- Meanwhile, trade uncertainty returns to haunt stocks
ECB meets – No action, but perhaps more cautious language
The European Central Bank (ECB) will announce its policy decision at 11:45 GMT, but the real action will likely begin with President Draghi’s press conference at 12:30 GMT. Policymakers already recalibrated their forward guidance at the previous meeting, so we are unlikely to get any major signals today. Hence, traders will focus mainly on Draghi’s overall tone.
The euro area economy has shown some signs of stabilization lately, but probably not enough to calm the ECB’s nerves around a deteriorating growth outlook. Meanwhile, the US is clearly preparing the ground for a trade dispute with the EU, amplifying downside risks to growth. Against this backdrop, Draghi will most likely maintain a dovish tone in general, so if there is any sizeable move in the euro, it could be lower – particularly if he hints the ECB is willing to consider more stimulus should the economy slow further.
EU to offer UK long ‘flexible’ extension – pound may like it
Staying in Europe, EU leaders will gather at ~16:00 GMT for an emergency summit to decide whether to offer the UK another Brexit extension, and if so, for how long. Theresa May has requested a short one, until June 30, but the EU is more likely to offer her a longer one until year-end, with the ‘flexibility’ of being able to leave earlier if the UK Parliament approves a deal in the meantime.
As for the pound, the risks seem tilted to the upside for now. A long extension would take the immediate threat of a no-deal exit off the table, diminishing the biggest tail risk, and would simultaneously fuel hopes that the UK could end up with a ‘softer’ Brexit or better yet, another referendum.
On the data front, UK GDP data for February are due, but focus remains on politics, not economics.
US inflation and Fed minutes coming up
Across the Atlantic Ocean, US CPI data for March and the minutes from the Fed’s March meeting are due for release. Markets already have a good sense of where the Fed stands, so the bulk of attention could be on the inflation prints.
Fed rate-cut expectations have grown, but one would hardly know by looking at a chart of the dollar. The world’s reserve currency has held up well, mainly because its other major peers – notably the euro, pound, and yen – aren’t attractive enough. Europe’s economy is in bad shape, the pound is tormented by Brexit worries, and Japan offers interest rates so low the yen isn’t appealing without risk aversion. Until one of these narratives starts to change, any massive downside in the dollar seems unlikely.
Stocks snap winning streak as (trade) reality sets in
US shares closed in the red on Tuesday, with the benchmark S&P 500 (-0.61%) index ending an eight-day winning streak, as investors realized that the next chapter in the trade saga will likely feature an EU-US standoff. The ‘final straw’ was a tweet by President Trump confirming he will likely impose tariffs on EU products.
On another note, the pullback may reflect traders cutting their exposure to US equities ahead of the upcoming earnings season, amid mounting concerns around profit and revenue growth this year.