ECB on tap – Will euro pop or drop?

ECB on tap.

Risk flows remain positive.

Nikkei 0.82% Dax 0.41%.

UST 10Y 1.08.

Oil $52.8.

Gold $1870/oz.

BTCUSD $32250/oz.

Asia and EU

No Data.

North America Open

EUR ECB 8:30.
CAD ADP 8:30.
USD Weekly Jobless Claims 8:30.

It’s been a generally quiet night of trade in Asian and early European dealing marked by continued risk on tones in the wake of a smooth inauguration of Joe Biden.

Equities remain well bid but were off their session highs and with stocks having rallied so hard and so fast some profit taking may be due today especially if US data continues to show some weakness as the new more virulent strain of COVID continues to spread throughout the country stretching medical systems to their limit.

The early morning focus however will be in FX as the ECB conducts its month rate announcement and presser. The market expects no change from ECB vis a vis monetary policy but will be keen to hear what Ms. Legarde will say regarding the exchange rate.

Generally the EU monetary officials stay out of the currency markets preferring exchange rates to float freely, but the recent weakness in the dollar has pushed the EURUSD to uncomfortable level for export driven EU economy and there is some speculation that Ms. Legarde may try to jawbone the EURUSD lower. But given the fact that it hasn’t reached the truly concerning rate of 1.2500 or higher her response may be more muted than the market thinks.

Ms. Lagarde may decide to be more circumspect in order not to conflict with Ms. Yellen who noted this week in her testimony that she preferred exchange rates be set by the market.

In either case Ms. Lagarde’s remarks today are unlikely to create much of a market reaction as she will almost certainly reaffirm that the ECB policy will remain as accommodative as possible in order for EU governments to continue to provide relief fiscal packages during the COVID shutdowns. That implies that the ECB will continue to practice shadow yield curve control in order to keep long term rates low across the region – most specifically the southern economies of Italy and Spain which have been hit particularly hard by resurgence of COVID and political instability.

All of this suggests that the EURUSD rally should remain contained for now even if Ms. Legarde does not address the exchange rate issue.