Market sentiment appeared to have a risk-off tilt as the anti-risk US Dollar and Japanese Yen rose at the expense of the cycle-sensitive
Australian Dollar. US equity futures pointed in the same downward
direction while Asia-Pacific stocks traded mixed. RBA Governor Philip
Lowe gave a speech, warning that monetary policy has its limits and that
fiscal measures are crucial in combatting the coronavirus. Read the
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Euro Outlook Ahead of ECB Minutes
It is difficult to say how the Euro will react to the publication of
ECB meeting minutes considering most of the attention now appears to be
focused on the central banks tension with the German high court. It
recently issued a ruling that deemed the 2015 asset purchases program
and the subsequent growth of the ECB balance sheet to its current size
illegal, giving the central bank three months to explain their policies.
The court said that unless such an explanation can be made, the
Bundesbank will not participate in the quantitative easing program. ECB
President Christine Lagarde defended the central banks decision and
affirmed her support of the Pandemic Emergency Purchase Program (PEPP).
This extraordinary measure by the ECB entails purchasing 750 billion
euros of debt this year in order to contain the financial fallout from
Covid-19.
If the underlying tone of the minutes strikes an unexpectedly gloomy
tone, it could lead to heightened liquidation pressure in the Euro.
Investors will be eagerly scanning the pages to find a more detailed
outlook on the ECBs position for its PEPP program. In a recent
interview, Mrs. Lagarde made it clear that monetary authorities “will
not hesitate to adjust the size, duration and composition of the PEPP to
the extent necessary”.
British Pound Braces for UK PMI Data
The British Pound may decline following the publication of flash PMI
data for May. Manufacturing, services and the composite reading are
expected to print at 37.2, 24.0 and 25.7 print, respectively. While this
is far below the neutral 50.00 figure, it is an improvement from the
prior month.
Worse-than-expected readings could inspire further rate cut bets from
the Bank of England as officials contemplate the use of negative
interest rates. Selling pressure in Sterling may also be amplified by
growing uncertainty about the outcome of Brexit. Last week, EU and UK
officials sent a chilling message about progress – or more accurately,
the lack thereof – which subsequently sank the Pound.
EUR/GBP Outlook
EUR/GBP is testing the lower tier of the key inflection range between
0.8986 and 0.9091 (purple-dotted lines) where the pair had previously
encountered both upside and downside friction amid market-wide
volatility in March. If EUR/GBP shies away from clearing the
multi-layered ceiling, a subsequent pullback may ensue. In this
scenario, selling pressure may start abating when the pair hits familiar
support at 0.8687 (red-dotted line).
