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In the latest ECB survey for Q2, professional forecasters revised down growth, inflation and core inflation forecasts for both 2019 and 2020. Inflation are projected to be below ECB's 2% target over the whole forecast horizon. Also, the reported noted that "probability distributions continued to indicate relatively high uncertainty around expected inflation in two years' time."

On growth, "respondents considered the current level of uncertainty to be very high and to be having an economic impact, mainly via companies' investment decisions." Also "risks to the forecasts for real GDP growth remained to the downside." The most cited downside risks was "potential impact of a hard Brexit. Many respondents refer to "further escalation of trade conflict between US and China, an the apparent slowdown in China". "Very few"mentioned upside risks.

HICP inflation forecasts (previous at Q1 2019):

• 2019 at 1.4% (down from 1.5%)
• 2020 at 1.5% (down from 1.6%)
• 2021 at 1.6% (down from 1.7%)
• Longer term at 1.8% (unchanged)

HICP core inflation forecast:

• 2019 at 1.2% (down from 1.3%)
• 2020 at 1.4% (down from 1.5%)
• 2021 at 1.6% (unchanged)
• Longer term at 1.7% (unchanged)

GDP growth forecast:

• 2019 at 1.2% (down from 1.5%)
• 2020 at 1.4% (down from 1.5%)
• 2021 at 1.4% (unchanged)
• Longer term at 1.4% (down from 1.5%).

GBPJPY has been on the sidelines this week and the current movement in the RSI and the MACD recommends that the short-term trading may continue to be uneventful as the former is still moving close to its 50 neutral mark and the latter shows no clear direction near the zero and red signal lines.

Traders, however, remain cautious as the market has recently attempted to violate the upward pattern that started in early January by marking a lower high below the 3 ½ -month peak of 148.86 and at 147.20. A rebound below 143.70 and probably near 142.76 could be a negative confirmation sign that a downtrend may be on the way. Further down, support could run straight to the 141 round-level.

Alternatively, a reversal to the upside could initially pause around 146.65 before the 147.20 peak comes into view. An aggressive rally may also reach the 148.86 top, though only a decisive close above the 149.50 former strong resistance would shift the neutral outlook in the bigger picture to a positive one. In such a case, the next target could be the 2017-2018 frequently-tested area around 150.30.

Sterling holds in a choppy mode on Thursday and so far, unable to advance despite optimism on sidelined fears of no-deal Brexit and EU’s approval for extension of Brexit day until 31 Oct.

Most of possible scenarios remain on the table as extension gives UK lawmakers time to work on existing plan until agreement but could also cancel Brexit or ask for new referendum.

Cable remains at familiar levels for the third straight day, with price action being repeatedly capped by daily cloud top (1.3110) which marks key barrier.

Strong upside rejections in past two days weigh and repeated failure to eventually break above cloud would keep pound at the back foot and shift near-term risk lower.

Bearish momentum on daily chart supports scenario, along with 20/30SMA’s (1.3135/45) which turned south and diverge, but fresh bears would look for more evidence on final close below trendline support (1.3050) that would unmask key 200SMA support (1.2975).

Conversely, close above daily cloud would generate initial bullish signal which needs confirmation on break above pivotal barriers at 1.3131/45 zone (Fibo 38.2% of 1.3381/1.2977/ 20/30SMA’s).

Res: 1.3079, 1.3094, 1.3110, 1.3131
Sup: 1.3050, 1.3025, 1.3000, 1.2975

Key takeaways

• The EU has granted an extension to 31 October and some EU leaders already appear open to the possibility of a further extension if needed.
• Near term, we monitor the response in the UK. The Conservative backbenchers want to get rid of Theresa May.
• Look out for local elections on 2 May and European elections on 23 May. Mood for snap election is low.
• No signs of imminent breakthrough in cross-party talks.
• We expect EUR/GBP will remain in the 0.85-0.87 range for now. Markets likely to focus on other things than Brexit now.
• Extension not only for the better from an economic perspective.

And now back to the UK…

After a very long meeting last night, EU leaders decided to grant the UK a 'medium' extension to 31 October (including taking stock in June). While a majority of the EU leaders wanted a long extension of 9-12 months, French President Macron played hard ball and argued for a much shorter extension. The extension is conditional on no reopening of the withdrawal agreement, participation in European elections and 'sincere cooperation'. The UK government has accepted the offer, meaning that the new Brexit day is now officially 31 October and the agreement does not need approval in the House of Commons (EU law is above British law). After the EU summit, German Chancellor Merkel sounded open to the possibility of a further extension.

Now, we will monitor the British politicians' reaction. While Conservative Party rules say there cannot be another no confidence vote in May's party leadership until December, the leaders of the Conservative backbenchers (the so-called 1922 committee) decided yesterday they will try to persuade May to quit soon. A bad local election on 2 May or bad European elections on 23 May may be what is needed to force Theresa May out. The problem is, however, that there is no obvious successor and a leadership contest may take up a lot of energy and time. May has no intention of stepping down.

It is difficult to predict what is going to happen but as it seems unlikely that the House of Commons will back Theresa May's deal and a breakthrough in the cross-party talks does not seem imminent, it may end up being the case that the EU leaders will have to decide once again in October. Right now, it is our base case but much can happen from here to October, see game tree on page 3.

The mood for a snap election is low but cannot be ruled out. While the Prime Minister previously had this nuclear option, the fixed term act means a snap election can only be called if Parliament dissolves itself by a two-thirds majority or the government loses a no confidence vote (and no new government is formed within 14 days). Otherwise, the next election is in 2022. Polls show Labour and Conservatives are neck-and-neck and the Conservatives risk both losing power to Labour and the whole Brexit process (with a higher probability of Brexit being reversed under a Labour government).

May’s deal, permanent customs union or second EU referendum With respect to the Brexit end-game, we think there are three options from here: May’s deal as it is (if the DUP and Brexiteers get so afraid of the extension that they eventually back the deal), May’s deal including a permanent customs union (if cross-party talks with Labour succeed, with the risk of splitting the parties) or a second EU referendum (a small majority is now in favour of remaining in the EU, although it is only very slim and uncertainty is high).

A no deal Brexit seems unlikely, as both the UK and EU have blinked, in our view, but of course we cannot rule it out completely. The idea of a soft Brexit (single market or single market and customs union) seems dead after the indicative votes held in the House of Commons.

EUR/GBP to stay in the 0.85-0.87 range near term

EUR/GBP was little changed after the EU leaders decided to grant the UK a medium-long extension to October and, for now, we think the cross will continue to trade in the 0.85- 0.87 range.

In case of a no deal Brexit, we still expect EUR/GBP to move towards parity. We still expect EUR/GBP to move down to 0.83 if the Withdrawal Agreement passes. Without the extension to October and with no imminent breakthrough, markets are likely to start focusing on other things than Brexit.

Extension prolongs period with high uncertainty

From an economic perspective, a long extension means we avoid a disastrous no deal Brexit tomorrow. However, the extension is not only for the better, as the period with high uncertainty for companies is prolonged, which would continue to have damaging effects on the economy. There is much evidence that companies have stockpiled due to no deal Brexit fears. Business investments in the UK fell in all four quarters last year, as companies have postponed or cancelled investment projects. Note also that EU27 companies are referring to Brexit uncertainties as a negative factor in e.g. businesses surveys.

European markets are trading higher as investors are feeling optimistic about the French and German CPI numbers. Both numbers matched the forecast and didn't drop below the previous reading. For the ECB lawmakers, this is an encouraging sign because the inflation picture isn't becoming worse.

Mario Draghi left all doors unlocked yesterday in relation to the bank's monetary policy. Overall, the statement was somewhat dovish. The bank had to acknowledge the fact that the growth has not only stalled in Europe but it has started to deteriorate as well.

Brexit Horror Will Stretch For Another 6 Months

Brexit horror show got another extension by the EU policymakers late last night. The extension has been granted until the end of October, leaving the investor with the guessing game of trick or treat. The extension deadline is much longer than what the U.K. leaders were hoping for but it is shorter than what many EU leaders had in their mind. However, the review of the progress will be done towards the end of June. May can thank French President Emmanuel Macron for this. He played hardball yesterday but it was also another way of assessing the Brexit progress because the EU is tired of this drama.

The British Prime Minister, Theresa May would have to face another challenge when she returns to parliament. A large number of her party members are going to create more chaos, they never supported any kind of long extension. They consider this as a betrayal of the 2016 referendum vote.

I believe that the chances of Brexit being canceled have strengthened once again. One can never ignore the possibility of another General Election taking place because her party members may want her to resign. Six month period is enough time for Tory party critics to hold a leadership contest which can replace her.

As for Sterling traders, the event hasn't produced any meaningful move. In fact, Sterling-Dollar pair's one-month volatility has crashed. This may pick up again as the UK parliament still needs to rectify the deal and the drama which the prime minister is going to face is no short of any surprises. Hence, I believe that this currency pair is going to remain favorite among day traders. investors, a longer period of extension means more uncertainty.

The Fed Minutes and Gold Price

The Fed minutes raised many eyebrows last night. Investors were thinking that the Fed isn't going to increase the interest rate this year at all. However, the minutes confirmed that if the economic data continue to support the economy, a rate hike could be on the table at the back end of this year. Luckily for the dollar bears, this wasn't the majority view, at least, not for the time being.

I do believe that for the time being the Fed is going to continue to sit on its hands and just monitor the situation carefully. The evidence of this comes from the fact that the gold price is still trading above the 1300 mark. For bulls, this is a critical level, it sends a strong signal of recovery and hope. As long as the price stays above this critical mark, we have hope that the price may cross the 1350 level.

The ECB remained on hold as was widely expected at 0.0% and the common currency had little reaction to the release. In the accompanying statement no reference was made to the recently announced TLTROs, rates are expected to remain at present levels throughout 2019 and QE debt to be reinvested for an extended period. Analysts point out that the ECB is expected to remain on hold for a long time, after the recent significant slowdown. In his press conference ECB President Mario Draghi, stressed the risks facing the Eurozone, also mentioning the risks from trade disputes after recent threats made from US president Trump to impose tariffs of European products. The ECB president avoided to comment on tiered negative rates, as it would require further analysis. We expect the EUR to remain data driven, but also sensitive to any further trade frictions with the US in the near term. EUR/USD managed to maintain a sideways movement above the 1.1260 (S1) support line, despite there being some volatility during Mario Draghi’s press conference. The pair could continue to trade in range bound movement today, yet may prove sensitive to the US financial releases as well as any statements of Fed officials later during the day. Should the market favour the pair’s long positions, we could see it breaking the 1.1300 (R1) resistance line, while if it comes under the selling interest of the market, we could see it breaking below the 1.1260 (S1) support level.

New Brexit extension until the end of October, granted to the UK.

The EU postponed any hard Brexit risks, by granting to the UK an extension of the Brexit date until the end of October. The decision as such, was not able to show a way forward for the resolution of the issue and ended providing little support for the GBP. Progress made will be reviewed probably in June and the UK may be required to take part in the UK Parliament elections, which are to be held in May (if no solution has been found until then). Looking at the big picture we would like to stress that the risk of a hard Brexit is only temporarily removed and all options remain on the table, while at the same time the UK was able to buy some breathing time. The overall plan is expected to cause an uproar back in London, as Tory hard Brexiteers seem to be getting impatient with May’s leadership and we could see them building up pressure by trying to over through her or discredit her. Also we would place considerable weight on the negotiations between the UK government and the opposing Labour party regarding Brexit. The fact that these two political processes run at parallel lines creates considerable confusion for the inner political stage of the UK. If we see the inner UK political stage destabilizing somewhat in the near term, we could see the GBP losing ground, while if the negotiations with the labour party start creating positive headlines, we could see the GBP getting some support. Cable maintained a sideways movement yesterday, above the 1.3070 (S1) support line. Please note that we could see the pair still being sensitive to any Brexit headlines, in the aftermath of the emergency Brexit summit. Should the bulls dictate the pair’s direction, we could see the pair breaking the 1.3175 (R1) resistance line, while if the bears take over, we could see the pair breaking the 1.3070 (S1) support line and aim for the 1.2970 (S2) support level.

Other economic highlights, today and early tomorrow

In today’s European session, we get Germany’s and France’s final HICP rates for March as well as Sweden’s CPI rate for the same period. In the American session we get the US PPI rates for March and a number of speakers from the Fed along with BoC’s Wilkins. Please note the release of RBA’s financial stability review tomorrow during the Asian session.

GBP/USD H4

Support: 1.3070 (S1), 1.2970 (S2), 1.2875 (S3)
Resistance: 1.3175 (R1), 1.3265 (R2), 1.3350 (R3)

EUR/USD H4

Support: 1.1260 (S1), 1.1220 (S2), 1.1175 (S3)
Resistance: 1.1300 (R1), 1.1340 (R2), 1.1380 (R3)

• ECB's Draghi hints at more stimulus, but euro tumbles only modestly and recovers quickly
• Dollar pulls back after disappointing US CPI data, looks to Fed speakers today
• EU grants Brexit extension – Varadkar's remarks indicate way forward

Euro tumbles as Draghi hints at more stimulus, but only modestly

As expected, the European Central Bank (ECB) kept both its policy and forward guidance unchanged yesterday. President Draghi maintained a cautious tone, highlighting that incoming data remain weak, especially in the manufacturing sector, and that the risks are still tilted to the downside. Most importantly, Draghi stressed – repeatedly – that the ECB stands ready to ‘use all instruments' to return inflation to its target.

This was a clear signal that if the economy deteriorates further, all options are on the table, ranging from abandoning plans for rate hikes to restarting QE. The euro fell, but not substantially, and certainly by less than one would have expected given hints that more easing may be on the way. Perhaps this illustrates that after years of loose policy, the effectiveness of verbal intervention – even by someone as credible as Draghi – has been exhausted, and that markets may need to see concrete action before pushing the euro lower.

Dollar retreats as underlying US inflation disappoints, equities climb

Euro/dollar quickly recovered all its ECB-related losses yesterday to trade even higher, with the move reflecting broad-based dollar weakness, as investors digested the disappointing US CPI data for March. Even though headline inflation beat expectations, the yearly core CPI rate ticked down to 2.0%, missing the forecast for holding steady at 2.1%. The underwhelming figures probably reinforced expectations that the next move by the Fed will be a rate cut; the implied probability for one by December now stands at roughly ~65%. The minutes from the March FOMC meeting didn't reveal anything new.

Expectations for lower borrowing costs boosted US stock markets though, with the benchmark S&P 500 adding 0.35%. To be fair, some optimistic remarks by Treasury Secretary Mnuchin that the US and China have ‘pretty much agreed on an enforcement mechanism' likely helped as well, as this was one of the sticking points. Alas, the market reaction on this headline was relatively limited, which implies that most of the ‘good news' are likely priced in already.

Today, both the dollar and stocks may take their cue from a plethora of Fed speakers, including Vice Chairman Clarida (13:30 GMT) and New York President Williams (13:45 GMT).

EU grants Brexit extension, but the real news come from Ireland's Varadkar

The EU leaders granted the UK an extension of the Brexit data until October 31 yesterday, with the option of leaving earlier if the British Parliament ratifies a deal in the interim. The delay was conditional upon the UK participating in the upcoming EU Parliament elections, and not reopening negotiations on the withdrawal agreement. The pound liked the news, outperforming most of its peers as the threat of a no-deal exit was taken off the table.

The most important news though, came from the Irish Prime Minister, Leo Varadkar. He hinted that if the UK remains in the EU customs union, he would be open to giving the nation ‘a say' on future trade deals. If his view is echoed by EU officials, that could boost the chances of the UK staying in the customs union, something that would solve the Irish border issue and hence pave the way for May's deal – or something similar – to pass through the Commons.

Despite ECS President Mario Draghi's dovishness about the Brexit and it's weight on the eurozone's growth the EUR/USD is still technically bullish

1.1255-65 is the POC zone which is supported by the bullish SHS pattern that point to the north. We can also see that the LOA (London Open Advanced) indicator/system is supporting the bullish move for the EUR/USD pair. Targets are 1.1286 (W H5 camarilla pivot) and only if the W H5 breaks we will see 1.1320-30. Have in mind that the overshot of W H5 is very bullish for the pair and that the bulls are strongly dominating. Only a break below 1.1240 will put the pair to neutral mode.

Pivot (invalidation): 111.20

Our preference Short positions below 111.20 with targets at 110.95 & 110.80 in extension.

Alternative scenario Above 111.20 look for further upside with 111.35 & 111.50 as targets.

Comment A break below 110.95 would trigger a drop towards 110.80

Pivot (invalidation): 1.3080

Our preference Long positions above 1.3080 with targets at 1.3120 & 1.3140 in extension.

Alternative scenario Below 1.3080 look for further downside with 1.3060 & 1.3030 as targets.

Comment The RSI is above its neutrality area at 50%.