Broad-based dollar strength dominated overnight markets as a combination of a dovish Draghi, tariff and position adjustments ahead of Friday AHE print were the primary drivers.
The EURUSD initially spiked higher on ECB assurance not to increase the size of their monthly bond purchases. But then plummeted when the central bank revised their inflation forecast for 2019 to 1.4 percent from 1.5 percent.
To the delight of the ECB doves, Draghi struck a dovish chord by subtly tweaking forward guidance and even suggested that the negative fall out from an escalation of a global trade war will keep the ECB sidelined for some time to come. Traders caught long, and wrong ran for the exits as the markets pushed back a more definitive shift in ECB policy expectation to mid-2019.
Ignoring advice from crucial trading allies and ranking members of his party, President Trump inked the steel tariff but included a provision for Canada and Mexico – the duties won’t apply to these countries if a Nafta deal is signed. Therefore, they won’t go into effect while negotiations are still going.
It’s abundantly clear the Trump is setting sights on China noting that while he has “great respect” for President Xi, he doesn’t know “if anything is going to come” of the US’s current negotiations with them around these measures. He also called these measures “a first stop.” suggesting further escalation is around the corner.
Currency Markets
The Euro
The downgrade in ECB’s inflation forecasts overwhelmed the hawkish shift from the removal of the easing bias in the statement. And with hawkish Fedspeak from Brainard and Powell angling to adjust language on top side risks at the March FOMC meeting, the short-term outlook for the EURUSD looks extremely murky.
The Japanese Yen
JPY focus turns to the BoJ today, but the BoJ is really up against it as JPY continues to trade firm on the backdrop of policy normalisation chatter. Unless the BoJ offers up an unlikely aggressive easing signal, Yen strength should remain in play over the short to medium term.
The Malaysian Ringgit
The prospects of a full-out trade war are weighing on regional sentiment as is the more hawkish Fed narrative is denting the Ringgit sentiment. We may see an extended pickup in regional outflows as Trump continues to beat the Trade war drums where he’s expected to take direct aim at Asia with his next tariff salvo.
Oil Markets
The stronger dollar and reality check that US production continues to ramp up is causing traders to pare back bullish bets. As well, they escalation of tariff wars continue to weigh on the forward demand side of the curve all but suggesting the path of least resistance is lower.
Gold Markets
The stronger dollar is weighing on Gold prices but uncertainty over the fall out of an impending trade war with China could result in acute drops in global equity gold should remain bid on dips in this probable scenario.
Source
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