Markets
Global core bonds lost ground today with German Bunds significantly underperforming US Treasuries. ECB Draghi confirmed strong EMU growth momentum which is an upside risk in 2018 to current forecasts. They strengthen the ECB’s believe in a return of inflation to target. This optimistic growth and inflation expectations were sufficient to start a new sell-off in the Bund even if Draghi tried to downplay the pace of changes to its communication strategy. Changes on the German yield curve range between -0.7 bps (30-yr) and +5.2 bps (5-yr). The German 2-yr, 5-yr and 10-yr yields tested key resistance levels, respectively at -0.55%, 0.05% and 0.62%. The US yield curve flattens with yield changes varying between +1.6 bps (2-yr) and -1.2 bps (30-yr).
The decline of the dollar reaccelerated temporary just before the start of European trading. EUR/USD set a new cycle top and USD/JPY filled bids south of 109. However, some calm returned. EUR/USD settled in the lower half of the 1.24 big figure. USD/JPY hovered close to, but mostly slightly north of 109. At the ECB press conference Draghi mentioned the volatility in the exchange rate as a source of uncertainty and that it could impact the chances of the ECB reaching its target. The ECB president also indicated that some communication on FX was not in line with what was agreed at the level of the IMF. However, it didn’t to prevent a resumption of the rise of the euro. EUR/USD jumped north of 1.25 during the press conference. At the same time, USD selling also reaccelerated in other USD cross rates. USD/JPY slipped (temporary?) below 109. AUD/USD traded north of 0.81. The trade-weighted dollar dropped more than half a big figure (currently 88.60 area).The euro rise/decline of the dollar slowed toward the end of the press conference, but the USD loss remains substantial. Conclusion: the ECB is unhappy with the rise of the euro, but its rhetoric was unable to stop this. At the same time, underlying USD weakness remains in place going into tomorrow’s speech of the US president Trump in Davos.
Sterling had a strong run of late, supported by decent UK data. Investors also grew more confident that Brexit negotiations might develop in a more constructive way. Cable filled offers well north of 1.43 this morning. EUR/GBP dropped to the 0.8690 support. From there, the sterling rally ran into resistance. CBI retail data showed modest activity in the sector (+12, close to expectations). Housing loans were lower than expected. The data at least provided no incentive for further sterling gains going into the ECB decision/press conference. EUR/GBP rebounded during the ECB press conference and trades currently in the 0.8735/40 area.
News Headlines
The ECB kept its policy rates and forward guidance unchanged at today’s policy meeting. Like at last year’s September policy meeting, the ECB exceptionally put a reference to euro strength in the opening statement. Draghi warned about the single currency’s strength/volatility, adding that it could create uncertainty and weigh on growth and inflation. FX markets weren’t impressed. The EMU’s growth momentum is strong and broad-based with balanced risks to the outlook. There are no signs of a pick-up in inflation tough, but strong cyclical momentum and recent data further strengthened the ECB’s confidence that inflation will converge to the 2%-target. Draghi tried to explain a misunderstanding which emerged from last month’s Minutes. They referred to the start of discussing changing the communication strategy early 2018 rather than effectively already changing it early 2018, according to the ECB president.
Norway’s central bank kept its policy rate unchanged at 0.50%. "The upturn in the Norwegian economy appears to be continuing, broadly in line with the picture presented in December," the Norges Bank said. EUR/NOK dropped slightly, testing the 9.58 support area.
