The Big Picture
• Draghi: Policies are working, give them time Yesterday, the European Central Bank met to decide on monetary policy and as was widely expected, no change was made. All the attention was directed to the press conference held by ECB President Mario Draghi following the decision, where he reaffirmed that rates are expected to remain low for a long time and that the Bank has not run out of policy instruments, thereby assuring investors that the prospect of further easing is still alive. The ECB Chief also signaled that the Bank’s existing policies need more time to show their effectiveness. After all, some measures introduced in March have not been implemented yet. The corporate bond purchases are set to begin in June, while no details were provided for the first TLTROs II auction. What is more, Draghi rejected the need for any short-term easing by saying that broad financing conditions have improved lately. This comments caused EUR/USD to spike higher and reinforce our view that the Bank is likely to remain on hold in the foreseeable future. Nevertheless, after the conference was over, the pair gave back all the gains to trade virtually unchanged. Although we expect the Bank to hold its fire for some time, the risks to that forecast are skewed to the downside. Further decline in the bloc’s inflation expectations could threaten the rise of actual inflation and may cause the Bank to raise its stimulus dose again in coming months. We believe that EUR/USD could start trading lower again, especially as ECB officials reopened the door for further action if needed.
• Today’s highlights: During the European day, we get the preliminary manufacturing and service-sector PMI data for April from several European countries and the Eurozone as a whole. Expectations are for all the indices to have risen somewhat. We believe that a potential stabilization in the global outlook may have caused business optimism to rise on hopes that the worst is over and that global demand will regain some of its lost glamour. An increase in these indices could support the euro somewhat at their release, but we would treat any short-term euro rallies as providing renewed selling opportunities.
• From Canada, we get the CPI data for March. Expectations are for a slowdown in both the headline and the core figures. Both rates declined in February, but core inflation remained very close to the BoC’s target of 2.0%. We expect inflation to slow even further in coming months, mainly because the Loonie has strengthened notably this year. This could prove to be a drag on the CPI as imported inflation is likely to ease with a stronger currency, a factor also acknowledged by the latest BoC statement. A slowdown in both figures could reverse some of the Loonie’s gains this week. We also get the nation’s retail sales for February and expectations are for a fall, a turnaround from previously. As these indicators are released at the same time, a decline in retail sales could add fuel to any potential negative reaction in CAD from a slowdown in inflation.
• In the US, the preliminary Markit manufacturing PMI for April is forecast to have increased somewhat, but this is usually not a major market mover.
• We have no speakers on Friday’s agenda.
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