FRS, ECB, oil: the market in search of a point of support

The European Central Bank didn't change policy, Draghi didn't tell anything new

The European Central Bank couldn't support a negative spirit and even NFP couldn't become a convincing argument for purchase of dollar. On Wednesday oil prices fell off for 5%, the report of the Ministry of Energy of the USA according to which inventories updated a historical maximum again became an occasion. We wait for May, the decision of FRS and the Japanese variations on local QE.

Theresa May will have the excellent occasion to declare start of Brexit on Tuesday, during the performance in the House of Commons of parliament with the report on last summit of EU leaders in Brussels. Before it, it`s necessary that both chambers of parliament on Monday, March 13, approved the government bill which was sent back for revision. Reaction of the EU shall follow such announcement within 48 hours, on a next meeting of leaders of the European Union on April 6 these directives can be discussed already actively. Anyway negotiations between the EU and Britain are expected not as tough as expects the market at the moment. In case of intense fall of pound at BOE meeting on Thursday measures for stabilization of situation through provision of additional liquidity can be announced. The British report on the labor market on Wednesday should be tracked.

The European Central Bank didn't change policy, Draghi didn't tell anything new. It is expected that key interest rates will remain at a low level during the long period of time and considerably will exceed the horizons of purchases of net assets. Draghi noted the inflation substantially grown in the eurozone, but right there explains it by increasing in energy costs. Rates remain, forecasts for GDP and for inflation of the eurozone are improved.

The European Central Bank decided on the beginning of an exit from QE in case of a victory of pro-European candidates on elections in Holland and France. Reducing amount of QE with possible increase in a deposit rate can be accepted in September, on the eve of elections to parliament of Germany. At a June meeting of the European Central Bank can warn about probability of such step.

Purchases within APP keep speed in €80 billion in a current month and further in the amount of €60 billion until the end of the year. Since April, the European Central Bank will suspend one of programs of unsecured currency issue thanks to which euro was devaluated more than for 20% for the last 2 years. European Central Bank plans to issue the last credit for a period of 2 up to 4 years under 0% per annum on March 23. In general, European Central Bank issued such 11 credits for the total amount of €938 billion, from them €432 billion should be extinguished in 2018.

The markets don't believe in stable dynamics and expect that turning will begin earlier though reducing QE before elections in Holland and France is hardly probable. Large players needed to create a certain movement, and euro reacted rather sharply, level 1.05 once again resisted. Draghi will perform on Monday, also explanations concerning information leakage on discussion of probability of increase in a rate before the termination of the QE program are interesting.

Merkel and Trump's meeting is scheduled on March 14. The Spiegel magazine predicts that Merkel intends to inform Trump of rather response actions in case of protectionism from the USA, in particular, intention of the USA to enter a boundary tax will become the main stumbling block. Statements of Trump`s team after the meeting will have strong influence on the markets.

The USA has no special need for increase in rates. Inflation of consumer spending at the level of 1,7%, − below the target purpose of FRS by 2%. The forecast of FRS for inflation for 2017 − 1,8%, at the moment FRS doesn't lag behind the forecasts, especially taking into account drop in oil prices and lack of manifestation fully of December increase in a rate on real economy. The labor market is in a quite good condition that is confirmed by data of the last NFP. The level of unemployment is slightly lower natural (4,7%) that is much higher than the forecast of FRS though the wages rise didn't exceed treasured 3% (in calculation in a year) and a labor productivity still low.

According to official data, the economy of the USA is on growth dive, the stock market of the USA on historical highs now, on this background chances of increase in a rate of FRS on Wednesday are close to 90%.

Whether can not happen it? Quite, if there is more or less «serious» pretext. Brexit, for example, or data on the USA on March 15 − is much lower than the forecast. FRS won't manage to change all forecasts anew as well as Yellen to rewrite the opening statement, therefore, reaction can be speculative, but in general result – zero.

FRS tried to obtain combination of forecasts with the market facts for a long time. The fact of increase is substantially considered by the market, therefore, you shouldn't expect sharp throws at the rate on the publication, and the main reaction will be on new forecasts of FRS`s members and Yellen`s opinion on time of the following increase in a FRS rate.

FOMC perfectly understands that expectation of stable growth is connected with Trump`s incentives which aren`t even on the horizon yet. There is no consent in the Congress, the revolt against the president is about to happen in Republican Party. Without obvious Trump`s incentives the disappointment of the markets can lead to sharp fall of the stock market of the USA, and the economy of the USA can begin fall.

Speculators on oil close the longs, and are afraid of opening shorts so far. The next OPEC meeting is expected on May 25 in Vienna and is supposed that the possibility of prolongation of the pact on reducing deliveries will be discussed at a meeting. If oil continues to become cheaper, the old kind scheme in style «everyone pro se» can return on the market.

Saudi Arabia declares impossibility of prolongation of the agreement on reducing oil extraction because of intensification of production of the American slate oil. Thanks to start of fields in the Gulf of Mexico and to extension of slate projects the American oil industry workers undertake to add on the market additional 560 thousand/bar daily within 2017. If within 2018 the growth continues with the same speed, then total production will reach 9,95 million/bar a day – the production rate of Saudi Arabia. Strong increase in prices for this purpose isn't required: in the project only $53 are provided in 2017 and $56 − are provided in the 2018th. The oil demand from the American oil refineries won't grow (16,17 million/bar a day within 2018) that will allow the USA either to reduce import, or to increase oil export.

Strong ADP prepared the markets for a possible positive of the labor market, but players preferred to be focused on weak growth of the salaries, and participants of the market intensified purchases of euro against dollar.

The current week is eventful, except FRS, it is worth tracking the summit of the G20 which will begin on Friday. Before the dollar will be under the descending pressure, participants of the market will close longs, especially, if FRS keeps forecasts invariable, and to rhetorician - soft even in case of increase in a rate.

China will please the markets with a small group of important data on Tuesday morning. Market reaction on Brexit and the block of important data of the USA on Wednesday will help to draw indirect conclusions on forecasts and rhetoric of FRS prior to a meeting, up to this point large players obviously intend to sell euro. In case of increase in a rate, but preserving forecasts invariable and the subsequent Yellen`s pigeon rhetoric is possible EUR/USD reverse in a long after an initial thorn on fall. By results of a meeting of BOJ it is impossible to exclude insignificant decrease in the amount of the program of the Japanese QE to ¥70 trillion that can lead to fall of USD/JPY.

Technical Analysis EUR/USD

EUR/USD


Technical Analysis USD/JPY

USD/JPY

Author: Lachlan Patel,
ForexChief Currency strategist