USD: Support remains in place

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.

EUR: ECB hikes slowly taken off the table

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.

GBP: Neither here nor there

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.

SEK: March CPI keeping rate hike in H2 a distant possibility

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).


Disclaimer

"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.

This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.

The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.

Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).