FX Daily: ECB containing EUR risk premium
All eyes on the ECB today, as markets closely watch two aspects of the meeting today. The potential top-up of the PEPP programme and President Lagarde's communication
USD: Further moving towards a soft USD environment
Markets are benefitting from the cautious Federal Reserve stance and the positive news on Covid-19 drug test results.
On the former, the Fed struck a downbeat tone on the economic outlook yesterday, sticking to its ultra-accommodative policy stance - with loose policy set to remain in place for longer. Support from central banks globally (today, the ECB should also reiterate its accommodative stance) and first European countries moving out of lockdown provide glimmers of hope for risk assets and should support higher beta FX today and keep USD soft.
EUR: ECB containing EUR risk premium and avoiding miss-steps
Markets will be closely watching two aspects of the ECB meeting today: the potential top-up of the PEPP programme and President Lagarde's communication. On the former, we see a further increase in size (from the current EUR750bntoEUR1.25trn) and scope (adding fallen angels)as likely, though the timing is uncertain. It may not happen today, but the ECB is likely to signal the eventual increase in purchases when it comes to its June meeting.
On the latter, following the unfortunate communication in March, we expect the ECB President to communicate a commitment to do 'whatever it takes' to help the eurozone economy and ensure financial stability. Both would be supportive of EUR. As EUR/USD trades with a modest ECB uncertainty risk premium, clear ECB communication should send it to 1.090. PEPP programme being extended already today would likely send EUR/USD to 1.095.
See ECB Cribsheet for details. April CPI is expected to fall to 0.2% but its explanatory power should be taken with a pinch of the salt given measurement issues (ie closed shops).
GBP: Helped by the general risk sentiment
The ECB message to do more on the PEPP programme should help GBP/USD to move above 1.2500 today. Supportive risk sentiment should put a downward pressure on EUR/GBP, with the cross continuing testing the 0.8700 level.
Oil FX: The worst may be over but still cautious outlook
Oil continues to recover, benefiting from the mix of the smallest increase in inventories in the US since March and Norway decision to reduce output (in line with the previous OPEC + decision). As our commodities team notes, if we see a continuation of this trend in the coming weeks, it could suggest the worst might be behind the oil market.
We remain cautious on oil-related currencies as brent is unlikely to move meaningfully above 25US$/bbl this quarter while the risk of a steep decline in WTI in mid-May (due to storage-related issues) is still in place. In the EM FX space, RUB looks the most attractive among commodity exporters given its relatively solid fiscal position. In the G10 FX space, upside to NOK should be limited and EUR/NOK to stay above the 11.00 level.
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