ECB negative rates in focus
In light of news that a major French Bank will layoff 1,600 employees, the topic of ECB negative interest rates effect on banks’ balance sheets has become hot again. Discussion on negative rates will be the focal point of this week’s ECB meeting. In March, the ECB’s dovish communication and members worry over the negative impact of low yields hit banking sector stocks hard. While it’s hard to pinpoint why these layoffs are necessary, reduced banks’ interest margins and profitable due to low rates are clearly not helping. Possible solutions to reduce the impact including ECB reserves tiers are finding a divided committee. Moreover, it is unlikely that a solution will be provided at this week’s ECB policy meeting. In March’s press conference Draghi stated, “possible measures that can preserve the favorable implications of negative rates for the economy, while mitigating the side effects.” Our focus will be on President Draghi’s view on tiered reserves, which would be a mixed, slight positive bias for euro area financial markets. On the one hand, tiered reserves would indicate higher profitably for banks but on the other, suggest negative rates for longer. Following the March meeting, were the ECB’s introduced TLTRO III and the announcement of modifications in forward guidance, we do not anticipate any new policy measures. The ECB provided a dovish bias via a reduction in economic and inflation forecasts indicating that the possibility of a further dovish surprise is unlikely. Rate markets have already begun pricing in an ECB interest rate cut. Additional feeling downside risk has increase will quicken the flattening of the EGB yield curve and weaken EUR further. EURUSD recovery was weak and would need a break above 1.1289 to extend the bullish tone.
Sterling likely to bounce
After rejecting PM May’s Withdrawal Agreement and failing to agree on any alternative, UK MPs are again counting on May’s persuasive power to obtain another extension agreement. Yet the outcome might be very different from what May’s extension period considered, as both houses of Parliament ratified a legislation that provides lawmakers the chance to impose legally binding changes into May’s divorce date.
Indeed, as May’s government is willing to postpone the date by 30 June 2019, it is becoming clearer that UK Parliament is willing to impose a longer period, thus prompting another debate among MPs that is taking place today. The recent talks initiated between the Conservative and Labor party brought nothing but gridlocks since no resolutions included a scenario where the UK would remain within the EU customs union, a major requirement for Jeremy Corbyn’s Labor party while being the exact opposite of Tory’s Brexiteers.
It is therefore very likely that the British pound gets a boost for the time being. Either scenario consisting of a short-term or a longer-term extension period would provide GBP bulls with good reasons to support the currency. However major risks remain since European leaders are again solicited for an emergency summit in Brussels on Wednesday and while a certain disinterest in Brexit emerges ahead of incoming EU election, the European Parliament is expecting to see a plan attached with the extension.
Currently trading at 1.3103, GBP/USD is heading along 1.3150 short-term