With a fairly quiet day on the data front, we expect muted price action on the US dollar crosses today with the trade weighted dollar remaining broadly stable. Yesterday’s FOMC minutes from the March meeting confirmed that the Fed is likely to remain on hold this year which, is turn, cements the dollar’s attractive interest rate differential vs the other G10 currencies.
ECB President Mario Draghi yet again managed to weaken the euro yesterday after hinting at possible mitigating factors for negative rates (see ECB Review). While positive for European banking stocks, any possible mitigating factors could hurt the euro because they signal that (a) negative rates are to stay with us for longer (that’s why the ECB looks to mitigate their negative effect) and the notion of rate hikes is becoming rather obsolete; (b) if the mitigating measures work, the next move on the interest rate side may be a cut (should the economy outlook deteriorate further). The ongoing cautious ECB bias suggests that the euro and EUR/USD will continue to lack catalysts for a move higher. In our view, EUR/USD will move meaningfully and persistently higher only when the US dollar embarks on a more broad-based weakening trend.
The six month extension of Article 50 modestly weighed on sterling because (a) a 'hard' Brexit is still in sight and (b) the extension is not long enough to allow the Bank of England to hike interest rates, meaning that sterling will miss out on one potential positive catalyst. In the meantime, the extension is unlikely to improve business confidence much, thus limiting the upside to the pound. With the bar for the Brexit deal to be passed through Parliament by the October deadline still rather high and the rising probability of a change in Conservative leadership ahead of that deadline (i.e. Conservative Party conference in September), this suggests EUR/GBP will struggle to move below the 0.8500 level.
In Sweden, March inflation data is in focus. Our economists expect headline inflation to continue to slide as last year’s energy price rise unwinds. Core inflation is likely to recover a little after the very weak February figure, but at 1.6% it will still be some way short of the 2% target. Coupled with the dovish ECB bias yesterday, we continue to see the bar for a Riksbank rate hike in 2H19 as rather high. We look for higher EUR/SEK from here and NOK/SEK to converge towards 1.10 (with the Norges Bank rate hike in the second half being very likely –the higher than expected Norway March CPI yesterday supports such a view).