Talking Points:

Euro Selling May Fizzle if ECB Easing Stops at Negative Deposit Rate
Pound Risks Tilted to the Downside on Status-Quo BOE Rate Decision
NZ Dollar Corrected Higher as Yen Rose on Risk Aversion Overnight

A monetary policy announcement from the European Central Bank headlines the economic calendar. The ECB has presumably had enough of persisting disinflation and is finally prepared to check the slide in price growth. Consensus forecasts see the main policy rate cut to a record low of 0.10 percent while the rate ECB pays banks to keep money in its deposit facility is seen moving into negative territory (-0.10 percent). We remain short EURUSD.

Steady disinflation has plagued the Eurozone since late 2011. The ECB attempted to push back against the trend last November by slashing its policy rate from 50 to 25 basis points, but the move proved ineffective. Mario Draghi and company have since mulled a long menu of policy alternatives to push banks – whose borrowing costs in the market have tended to trail the official ECB rate in recent years – to pass on the savings to the broader economy.

With this in mind, a range of scenarios emerges. Delivering stimulus beyond a move into negative territory on the deposit rate – such as another round of LTROs or QE-style asset purchases – is likely to send the Euro sharply lower.An outcome in line with forecasts may apply initial downward pressure but follow-through could be limited in as much as investors have already priced it in. Indeed, a relief rally may ensue as hopes for bolder action fizzle. Needless to say, anything less than a negative deposit rate – including a conventional interest rate cut – is likely to be seen as hawkish and send the common unit higher.

Separately, the Bank of England is likewise due to deliver its monthly policy announcement but the outcome will probably amount to another non-event for the British Pound. UK economic news-flow has been broadly stable relative to expectations since the May sit-down but inflation has remained anemic, hinting the central bank is far from seeing the kind of drawdown on spare capacity that would prompt rethinking its accommodative posture.

Sterling has tracked UK 2-year bond yields higher for the past 15 months, suggesting traders continue to entertain a relatively hawkish view of the BOE. The central bank’s decision to revise its forward guidance framework in favor of one less prone to feed tightening bets in February has failed to turn market sentiment thus far, but continued inaction is bound to leave the bulls disappointed eventually. As such, the risks seem tilted to the downside for the UK currency. Indeed, a cautious reversal in GBPUSD is arguably already underway.

The New Zealand Dollar outperformed overnight, correcting after hitting a three-month low yesterday. The Japanese Yen likewise advanced as a move lower on the Nikkei 225 stock index drove haven demand for the safety-linked currency. The Canadian Dollar continued to slump on follow-through from a dovish BOC policy announcement.
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Asia Session

GMT

CCY

EVENT

ACT

EXP

1:30

AUD

Trade Balance (A$) (APR)

-122M

510M

920M

1:45

CNY

HSBC Services PMI (MAY)

50.4

–

51.4

1:45

CNY

HSBC Composite PMI (MAY)

50.2

–

49.5

European Session

GMT

CCY

EVENT

EXP

IMPACT