Forex today: ECB cautious, dollar rally continues

Forex today was dictated by the ECB in the main with a close eye on US yields where the benchmark slipped below the 3% psychological level while the dollar maintained the 91 handle, supported by surprise data beats.

Meanwhile, the session got off to an early start in NY with the ECB leaving policy and the wording of their statement unchanged. At first, the euro went bid on the release of the statement and the DXY drifted lower to make a low for the day down at 90.95, but recovered, and some, to 91.63 when traders picked up the air of caution from the presser. 

Analysts at Westpac have the outcome of Draghi' presser as follows:

"President Draghi repeated their patient, prudent and persistent policy stance and stated that the Governing Council did not discuss their June meeting or levels of FX. Indeed, Draghi said that “we didn’t discuss monetary policy per se.” A Bloomberg report claimed that Draghi rebuffed a proposal to discuss what to do after the Sep 2018 provisional date for the end of asset purchases."

Analysts at ANZ summed up that "the ECB is watching the data closely as some other indicators, like the drop in backlogs in manufacturing, may suggest a fall in demand. Draghi’s bottom line: Caution in reading recent developments, but an unchanged confidence in inflation returning to target."

Meanwhile, the US 10yr treasury yield dropped back below the 3% level and from its four-year high of 3.03% to 2.98%. However, most of that move came before the ECB decision. The 2's climbed two basis points to 2.49%. 

While the Fed fund futures yields are continuing to price the next rate hike in June as a done deal, the divergence between the Fed and ECB was in play again through the euro that fell hard after the initial short covering to 1.2210 post ECB, (wrong-footed on Draghi/statement less dovish than expected) and due to dollar month-end buying/ DE 10 year bund trading sub 0.60%.

As for other currencies, the pound was in retreat from the 1.40 handle, caught up in the euro flows around the ECB, initially bid on the outcome but subsequently dropped to 1.3903 the low. However, the pair had been at 1.3895 in the early morning of the European shift on the back of Brexit concerns and the Commons debate about the EU's customs union. The cross was underwater on the ECB and ended the US session at 0.8695. The BoE is tipped to hike on May, but of late has been come more of a coin toss given that the more recent and key data missed expectations in the UK economy. 

USD/JPY was correlated to US yields and slipped back from the 109.45 level to a low of 109.06 before spiking post the ECB and solid US data. The pair finally chopped in a narrow range to a close in the 109.30's. The Kiwi touched 0.7056, which is the lowest since 28 December. However, the rage overnight was between there and 0.7095, easing back sharply to below the 10 and 21-hr smas for a close of 0.7061. The Aussie was choppy in the early part of the NY session following a volatile climate in European trade where the 0.7588 highs were met with supply down to the low of 0.7546.

Key notes from US session:

• Draghi speech indicates that recent slowdown matters much and APP end will be moved to 2019
• Wall Street stocks surge higher on better earnings and sub-3% on 10-year yields
• Fundamental and Political wrap: ECB confident but cautious

Key events in Asia:

Analysts at Westpac offered their outlook for today's Asia session; BoJ on the cards:

"Australia’s calendar is low key (Q1 producer prices) but there is plenty to watch elsewhere, including the meeting between Korean leaders Moon Jae-in and Kim Jong-un on the border.

The Bank of Japan reviews monetary policy today (no fixed time but usually early afternoon Sydney time – recent announcements were in the 1:30-2:30pm Syd window). No change is likely in the key policy settings: a benchmark -0.1% deposit rate, “around” 0% yield on the 10 year government bond and an annual JPY80 trillion expansion in bond holdings.

The latter pace has not been reached for some time, because the BoJ simply doesn’t need to buy so many bonds to keep the 10 year yield near zero. It makes sense for the BoJ to drop this guidance and this quarterly “Outlook” meeting with fresh forecasts would be a suitable time. But to do so could spark a sharp rise in the yen and muddy the policy messaging, so it remains only an outside chance."

There is plenty of data to watch too. Japan releases several reports well before the BoJ announcement, including Tokyo Apr CPI and Mar industrial production.