Previewing the Fed and ECB for forex

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From Goldman:

1. Shifting tone at the ECB. The market’s interpretation of the March ECB meeting was hawkish. As we have flagged, investors gave more weight to the upside growth and inflation forecast revisions and to President Draghi’s comments on changes to the Statement than to his remarks reasserting the Governing Council’s commitment to the ECB’s current policy stance. We expect ECB communications in coming weeks to reinforce their recent upgrade to the economic outlook. While our economics team thinks their growth and inflation forecasts are too optimistic, they will likely be EUR supportive in the meantime. We therefore maintain our preference for EUR/GBP and EUR/JPY upside, as we flagged ahead of the ECB meeting. Both crosses (at 0.87 and 122, respectively) remain below our 3-month targets of 0.90 and 127.

2. Too little economic and political downside priced into Sterling. EUR/GBP upside is also supported by the macro outlook and political developments in the UK. There are signs that momentum in UK economic activity is weakening and we expect lower growth in coming months. Article 50 could be triggered as soon as this week and news that European leaders will not make the divorce easy should lead to a more negative risk premium being built into the currency.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.