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Attention Turns to the European Central Bank

25 April 2017FXEconomics

With the odds giving Macron a 90% probability of winning round 2 of the French Presidential Election, attention now turns to the ECB meeting on Thursday.


Strategy: USD Index needs to hold around 99.10 - 24 to stage a rebound.

USD: Trump's "tax plan" to be unveiled this week may only provide broad "parameters" targeting 3% annual US GDP growth. With a border adjustment tax (BAT) to fund proposed tax cuts likely to be missing as part of the plan, this could worsen the budget deficit in the short term and push US bond yields higher. The USD Index has been consolidating this year and needs to hold around 99.10 - 24 in order to stage a rebound.


German Ifo for April continues to show strong momentum, printing at 112.9 and higher than the 112.4 expected. Citi analysts note with current assessment near record levels and expectations pointing to further improvement, the German economy continues to strengthen.

Strategy: EUR to underperform especially against the Pounds (GBP).

EUR: With French elections results in line with expectations, gains in EUR post results were short lived. The EUR/USD rallies to test a 109.40 high before retracing, and markets are now discounting a Macron win in round 2. Investors' focus now shifts to the European Central Bank (ECB) meeting on Thursday. A dovish bias could send the EURUSD back down to around Friday's close at 1.0726 and making it difficult to break 1.1125-42. The EUR/GBP may move lower with UK polls increasingly favoring PM May to improve her party's lead in the upcoming June 8th elections. This would likely support further gains in the Pounds (GBP), potentially targeting 0.8017 on the EURGBP cross.


Citi analysts forecast that Australia's headline and core inflation for the quarter ending March (to be released Wednesday) to rise 0.7% and 0.5% respectively. This is unlikely to change the outlook for a steady cash rate.

New Zealand's inflation reading for the quarter ending March was the strongest in 5 years. While Citi analysts expect the Reserve Bank of New Zealand to raise its inflation forecasts, it expects the central bank to keep cash rates on hold until Q1'18.

Strategy: AUD capped versus USD and seen underperforming on crosses.

AUD: Following New Zealand's strong inflation reading last week, market consensus and Citi forecasts are positioned for a stronger Inflation reading from Australia on Wednesday. A disappointing reading potentially raises the risk for the AUD as investors may readjust their expectations for a more dovish bias from the Reserve Bank of Australia.

NZD: Flows into NZD have been strong following the above consensus inflation reading last week. The NZD is poised to continuing outperforming the AUD especially if Australia's inflation release on Wednesday disappoints the market.


Singapore's headline and core inflation for March were unchanged at 0.7% and 1.2% respectively, in line with expectations. While imported inflation has picked up, domestic price pressures remain subdued. Hence there is no urgency for the Monetary Authority of Singapore (MAS) to tighten policy yet. However, more positive data surprises could change the MAS' guidance particularly during the release of the Annual Report in July or when GDP forecasts are revised in August.

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