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ECB President Mario Draghi poured cold water onto hawks who had anticipated a more upbeat policy statement following recent improvement in macroeconomic data. However, the central bank downgraded the inflation forecasts for three years despite upward revision on GDP growth. The forward guidance was slightly less dovish with the reference "or lower" removed. Honestly, all of us understand that, at the currently exceptionally low (some are negative) interest rates, further rate cuts would offer little help to the economy. Notwithstanding expectations that the ECB would begin preparing the market over QE tapering, the central bank maintained the easing bias, reiterating the commitment to accelerate its monthly asset purchases if necessary. The single currency remains under pressure after dropping to a one-week low against the US dollar.

On domestic developments, the ECB acknowledged that the intermeeting data have confirmed "a stronger momentum in the euro area economy, which is projected to expand at a somewhat faster pace than previously expected". Policymakers noted that "the risks to the growth outlook are now broadly balanced" and dropped the previous reference that risks were tilted to the downside. On inflation, the central bank was aware of the situation that stronger economic expansion has not yet translated into stronger inflation dynamics. The flash estimate of the HICP inflation in May decelerated to +1.4%, from +1.9% in April and 1.5% in March. ECB attributed the volatility to the movement in "energy prices and temporary increases in services prices over the Easter period". It also pointed out that "measures of underlying inflation continue to remain subdued". Therefore, "a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and support headline inflation in the medium term". At the press conference, President Draghi noted that modest wage growth is a key reason to the subdued inflation rate. Despite the improvement in the employment market, Draghi indicated that many of the jobs created recently are of relatively poor quality (temporary or part-time job). He added that "we need to be patient... and persistent".

On the updated economic projections, the staff forecast that GDP would expand +1.9% this year, up +0.1 percentage point +1.8% projected in March, before easing to +1.8% and then to +1.7% in 2018 and 2019, respectively. Note that growth forecasts for 2018 and 2019 were also revised higher +0.1 percentage point from previously. On inflation, the staff revised lower the forecasts to +1.5% for 2017, +1.3% for 2018 and +1.6% for 2019. The corresponding estimates in March were +1.7%, +1.6% and +1.7%.

The closely-watched interest rate and QE outlook were not changed materially. As expected, the central bank kept the main refi rate, the marginal lending rate and the deposit rate unchanged at 0%, 0.25% and -0.4% respectively. It suggested these policy rates would "remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases". The reference "or lower" was removed in this meeting. The central bank also affirmed that the QE program would be mainained at the monthly pace of 60B euro. It would continue "until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim". The disappointment here is that policymakers have mentioned nothing about potential tapering.

USD/CAD - 1.3508

 
Recent wave: Only wave v of c has ended at 0.9407 and wave C of major A-B-C correction is underway for headway to 1.4700

Trend:  Near term up

 
Original strategy       :

Sold at 1.3500, Target: 1.3330, Stop: 1.3560

Position: - Short at 1.3500

Target:  - 1.3330

Stop: - 1.3560

 
New strategy             :

Hold short entered at 1.3500, Target: 1.3330, Stop: 1.3560

Position: - Short at 1.3500

Target:  - 1.3330

Stop:- 1.3560

Although the greenback rebounded after finding support at 1.3426 and further consolidation would be seen, reckon resistance at 1.3547 would hold and bring retreat later, below said support at 1.3426 would signal the rebound from 1.3387 has ended and bring retest of this level, break there would extend the fall from 1.3794 top for further weakness to 1.3350, then towards 1.3300, however, loss of near term downward momentum should prevent sharp fall below 1.3250-60.

In view of this, we are holding on to our short position entered at 1.3500. Above said resistance at 1.3547 would abort and prolong consolidation, risk rebound to 1.3571-79 (previous support and 50% Fibonacci retracement of 1.3770-1.3387), however, reckon upside would be limited to 1.3620-25 (61.8% Fibonacci retracement) and bring another decline later. 

To recap, wave B from 1.3066 is unfolding as an a-b-c and is sub-divided as a: 1.2192, b: 1.2716 and wave c is a 5-waver with i: 1.1983, ii: 1.2506, extended wave iii with minor iii at 1.0206, wave iv ended at 1.0781 and wave v as well as wave iii has ended at 0.9931, hence the subsequent choppy trading is the wave iv which is unfolding as (a)-(b)-(c) with (a) leg of iv ended at 1.0854, followed by (b) leg at 1.0108 and (c) leg as well as the wave iv ended at 1.0674. The wave v is sub-divided by minor wave (i): 0.9980, (ii): 1.0374, (iii): 0.9446, (iv): 0.9913 and (v) as well as v has possibly ended at 0.9407, therefore, consolidation with upside bias is seen for major correction, indicated target at 1.3700 and 1.4000 had been met and further gain to 1.4700 would be seen later.

USD/CHF - 0.9675

Original strategy :

Sell at 0.9720, Target: 0.9620, Stop: 0.9755

Position : -

Target :  -

Stop : -

New strategy  :

Sell at 0.9720, Target: 0.9620, Stop: 0.9755

Position : -

Target :  -

Stop : -

Dollar’s rebound after marginal fall to 0.9613 suggests consolidation above this level would be seen and corrective bounce to 0.9700 is likely, however, reckon upside would be limited to resistance at 0.9720 and bring another decline later to 0.9600-05 (50% projection of 1.0100-0.9692 measuring from 0.9808) but oversold condition should limit downside to 0.9570 and price should stay above support at 0.9550, risk from there has increased for a rebound to take place later.

In view of this, we are looking to sell dollar on recovery as resistance at 0.9720 should limit upside. Above 0.9740 would abort and signal a temporary low is formed instead, bring a stronger rebound to 0.9761 resistance but price should falter below resistance at 0.9808.

• European equities moved higher in the morning session, but gave back the gains in the afternoon session, both before and after Draghi's press conference. US equities open little changed awaiting former FBI's Comey testimony.
• The ECB kept its policy unchanged, but removed its easing bias on rates because the ECB no longer takes deflation risk into account. New staff forecasts showed upward revisions to GDP and downward revision for CPI. Risks to the eco outlook are now balanced and no longer tilted to the downside.
• Q1 EMU GDP growth was upwardly revised from 0.5% Q/Q to 0.6% Q/Q, the fastest pace since 2015. Details showed that investments contributed significantly, 1.3% Q/Q, following an upwardly revised 3.4% Q/Q in Q4 2016. Consumption rose by 0.3% Q/Q and government expenditure by 0.4% Q/Q. Net exports declined by 0.1% Q/Q.
• German industrial production rose more than predicted in April (0.8% M/M from upwardly revised -0.1% M/M in March), with a fourth consecutive increase in manufacturing adding to signs of underlying strength in Europe's largest economy.
• The US labor market remains a bright spot in the economy as fewer Americans filed for unemployment benefits last week, with hiring managers decrying a scarcity of available workers, Labour Department data showed. Weekly jobless claims declined from 255k to 245k (vs 240k expected).
• Italy's biggest banks may help Rome bail out Popolare di Vicenza and Veneto Banca to avoid being hit by costly depositor guarantees if European regulators shut them down, sources close to the matter said.
• Italy moved away from a possible early vote this year after a multi-party agreement on a new election law failed to hold up in parliament. Senior lawmakers from the ruling centre-left PD blamed the opposition Five Star Movement's lawmakers for voting in favour of an amendment to the bill that had not been previously agreed upon.

Rates

ECB stresses subdued inflation; no hurry to normalize

Global core bonds parted ways today. The US Note future trades near opening levels while the German Bund outperformed as the ECB cut its inflation forecast and doesn't seem to be in a hurry to normalize policy despite tiny steps on the forward guidance. Good EMU and US eco data had no impact on trading. At the time of writing, the German yield curve bull flattens with yields 1.1 bp (2-yr) to 4 bps (30-yr) lower. Changes on the US yield curve vary between -0.1 bp (30-yr) and + 0.9 bps bps (10-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed up to 3 bps with Spain, Portugal (-9 bps) and Italy (-12 bps) outperforming. Italian BTP's performed strong as Italian early election plans took a snag (see headlines).

The ECB kept its monetary policy unchanged, but altered its forward guidance by removing its easing bias regarding policy rates. The Governing Council now expects its key policy rates to remain at present levels for an extended period of time. Previously, the guidance stated "at present OR LOWER levels". The omission reflects the fact that the ECB no longer fears deflation risk. Asset purchases on the other hand are expected to run at least until December 2017 or beyond that date if necessary (in case things turn less favourable). The central bank didn't discuss policy normalization/tapering and Draghi managed to keep expectations about such potential action in September very low key.

The ECB's main argument to hold a very easy monetary policy remains subdued underlying inflation pressure. The new June staff forecasts also downgraded inflation projections in 2017 (from 1.7% to 1.5%), 2018 (1.6% to 1.3%) and 2019 (1.7% to 1.6%) even if Draghi admitted that this was almost entirely due to lower oil prices. Somewhat confusing, the central bank governor also said that the ECB is increasingly confident that EMU inflation will reach its 2% target in a durable way. The central bank is more optimistic on economic growth which continues to gain momentum. New GDP forecast increased for 2017, 2018 and 2019 by 0.1% percentage point to 1.8%, 1.7% and 1.6% respectively. More importantly, the ECB now thinks that risks to its economic scenario are balanced and no longer tilted to the downside.

The Irish Treasury (NTMA) successfully tapped the on the run 10-yr IGB (€0.7B 1% May2026) and 30-yr IGB (2% Feb2045) for a combined €1B, the maximum amount of offer. The auction bid cover was a strong 2.12. With the completion of today's auction, the NTMA has issued €8.75B bonds, compared to its stated target range of €9-13B in the bond markets this year.

Currencies

EUR/USD off the recent highs as Draghi stays soft

The ECB's policy statement was the first in a series of key market events. The ECB made only an incremental step to policy normalisation. Markets were apparently positioned for a slightly bigger step. EUR/USD lost modest further ground during the ECB's press conference and trades currently at 1.1220. USD/JPY maintains most of this morning's technical rebound. The pair is trading in the 110 area going into the testimony of former FBI boss Comey before the Senate.

Overnight, Asian equities traded with modest gains. Good Chinese trade data gave investors some comfort even as the focus was on the ECB and on Comey's testimony. USD/JPY tested the 110 barrier early in Asia, but returned to the mid 109.50 area as the equity momentum eased. EUR/USD also traded little changed in the 1.1250 area.

European stocks opened with modest gains. Initially, the USD showed no clear trend, but it gradually found a better bid in technical trade. EMU Q1 growth was revised higher to 0.6% Q/Q and 1.9% Y/Y (from 0.5% and 1.7%). However, the report didn't help the euro. USD strength prevailed. USD/JPY rebounded to the 110 area. EUR/USD dropped to the 1.1230/40 area.

The ECB as expected left its policy rates and the pace of asset purchases unchanged. The ECB raised its growth outlook and changed the balance of risks to growth to balanced. Draghi omitted guidance that interest rates might be cut further. At the same time, the ECB also lowered the inflation forecast for the policy horizon. In the end, the ECB didn't give any clear guidance on an imminent policy tightening. The changes to the assessment were limited. European yields declined a few basis points during the ECB's press conference and EUR/USD dropped temporary to the 1.12 area. Markets apparently expected the ECB to have come a bit closer to a next step in the normalisation process. The focus on markets now turns to the Comey testimony before a US sentiment committee. For now, markets apparently don't expect any lasting harm for team Trump. The dollar is holding near the intraday highs against the euro (EUR/USD currently at 1.1220) and yen (USD/JPY 110.05/10).

Sterling going nowhere, awaiting election result

Sterling traders had quite a boring trading session as markets awaited the outcome of the UK Parliamentary election. Especially EUR/GBP trading developed in an extremely tight range in the 0.8665/0.8700 area. Remarkably, EUR/GBP was hardly affected by the EUR/USD decline during the ECB press conference. On the other hand, cable to a large extent followed the EUR/USD decline even as part of this move was ECB-driven. In the end, today's intraday moves will probably be insignificant once the election result is available. EUR/GBP trades currently in the 0.8680 area. Cable is changing hands in the 1.2920 area.

GBP/USD - 1.2920

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

Cable has finally retreated after intra-day brief rise to 1.2978, suggesting consolidation below this level would be seen and weakness to 1.2885-90 cannot be ruled out, however, break of indicated support at 1.2872 is needed to signal top has been formed, bring further weakness to 1.1245-50 and possibly test of key support 1.2830 which is likely to hold on first testing.

On the upside, expect recovery to be limited to 1.2945-50 and said resistance at 1.2978 should continue to hold, bring another retreat. Only break there would extend gain to 1.3000 but still reckon upside would be limited to 1.3015 resistance and recent high at 1.3048 should remain intact.

EUR/USD - 1.1213

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

Failure to extend early rebound from 1.1204 and the subsequent retreat after faltering below strong resistance at 1.1285 suggest further consolidation would be seen and weakness to 1.1195 is likely, however, break of indicated support 1.1164 is needed to confirm top has been formed at 1.1285, bring subsequent decline to 1.1145-50 first.

In view of this, would not chase this fall here and would be prudent to stand aside in the meantime. Above 1.1245-50 would bring another bounce to 1.1270 but only break of said resistance at 1.1285 would revive bullishness and confirm recent upmove has resumed and extend further gain to previous chart resistance at 1.1300, break there would encourage for headway to 1.1340-45 and later towards chart point at 1.1366.

Daily Pivots: (S1) 108.91; (P) 109.71; (R1) 110.20; More...

USD/JPY's recovery from 109.11 extends higher but it's kept well below 111.70 resistance. Intraday bias remains neutral at this point. Another fall is still expected as long as 111.70 resistance holds. Below 109.11 will target 108.12 low first. Break will extend whole decline from 118.65 to 61.8% retracement of 98.97 to 118.65 at 106.48. As such decline is seen as a correction, we'll looking for bottoming signal around 106.48. Meanwhile, break of 110.70 will suggest near term reversal and turn bias back to the upside for 114.36 resistance instead.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. It's uncertain whether it's completed yet. But in case of another fall, downside should be contained by 61.8% retracement of 75.56 to 125.85 at 94.77 to bring rebound. Overall, rise from 75.56 is still expected to resume later after the correction from 125.85 completes.

Daily Pivots: (S1) 0.9615; (P) 0.9646; (R1) 0.9676; More.....

USD/CHF's recovery from 0.9613 continues in early US session but it's staying well below 0.9807 resistance so far. Intraday bias remains neutral for the moment. Deeper fall is expected with 0.9807 intact. When decline from 1.0342 resumes, we'd tart to look for bottoming signal again as it approaches 0.9443 key support level. However, considering bullish convergence condition in 4 hour MACD, break of 0.9807 will indicate near term reversal and turn outlook bullish for 1.0099 resistance next.

In the bigger picture, USD/CHF is still bounded in medium term range of 0.9443/1.0342 for the moment. Consolidative trading would likely continue and medium term outlook remains neutral. Break of 1.0342 key resistance is needed to confirm underlying bullish momentum in the pair. Meanwhile, downside attempts should be contained by 0.9443 key support level. However, sustained break of 0.9443 will carry larger bearish implication and target 0.9 handle.

Daily Pivots: (S1) 1.2908; (P) 1.2937; (R1) 1.2988; More...

Intraday bias in GBP/USD remains neutral for the moment. On the downside, below 1.2768 minor support will extend the fall from 1.3047 to 1.2614 resistance turned support. Decisive break there should confirm completion of the consolidation pattern from 1.1946 and resume the larger down trend through this low. On the upside, break of 1.3047 will extend the correction with another rise towards 1.3444 key resistance.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. The rejection from 55 week EMA is maintaining bearishness in the pair. Also, at this point, as long as 1.3444 resistance holds, fall from 1.7190 is still expected to continue. Break of above mentioned 1.2614 support will affirm this bearish case.

Highlights:

• Housing starts fell to 195k annualized units in May from 213k in April.
• Residential investment is set to be a small drag on growth in Q2 following a double digit gain in Q1.
• Ontario and Quebec recorded sizeable declines but were still higher year-to-date relative to 2016. The Prairies saw an increase in May as homebuilding activity continues to pick up from last year.
• Both single and multi-unit starts declined in May. On a trend basis, single unit starts edged down from a multi-year high while multis continued to pick up.
• Building permits edged down to 200k in April, and on a trend basis, narrowed the gap between permit issuance and starts. That implies less upside risk to starts going forward.

Our Take:

Five months into 2017 and Canadian housing starts are still running at the strongest pace in five years, but it appears we are entering a cooling phase in the housing market that should see homebuilding activity moderate over the second half of the year. We expect that trend will be driven by Ontario, where starts are already beginning to retrace Q1's multi-decade high. A decline in Toronto accounted for much of the province's drop in May. It seems a bit early to attribute this to regulatory changes that began to cool the city's hot resale market in April. Starts usually lag resale activity, so we think the true regulatory-induced slowdown will take hold later this year. Offset is coming from improving activity in the Prairie provinces as oil-producing regions continue to recover from a downturn over the last two years. And while homebuilding in British Columbia has slowed relative to last year's torrid pace, there is risk that starts regain momentum alongside a nascent rebound in the province's resale market. On balance though, we expect worsening affordability and housing policy changes will contribute to a slowdown at the national level. This will result in a modest drag on GDP growth from the residential sector, which has contributed positively in all but one of the past twelve quarters.