It’s a day that will have a lot of impact out of the US later this afternoon, but that US impact will also be felt when we hear from Mario Draghi during his press conference and statement when we get the ECB rate decision later today. As President Trump is expected to sign in the steel and aluminium import tariffs later today, it seems that its yet to be decided even whether Mexico or Canada will be exempt or not. Another well thought out plan by Trump administration.
With these potential tariffs close to being signed in global trade wars are the main talking point, and that could also be the case at Draghi’s press conference later this afternoon. The trade wars are getting personal now as the European Commission have now drawn up a list of American products that are in their sights for retaliatory tariffs if President Trump doesn’t back down over steel, these include peanut butter, orange juice and bourbon. There’s two of my breakfast staples gone! (I don’t like orange juice).
The news that both Canada and Mexico could be exempt from the tariff bill that Trump will sign later left stocks off their lows last night and the US dollar under pressure, trading at its worst levels for a week. The President is using the tariffs to push its neighbours on a good NAFTA deal. Canadian PM Trudeau has said that he had a clear phone call with Trump who- explained the position. The question is whether Trump will get his way or not, and will a NAFTA deal be enough for him to change his mind over the tariff bill. Trudeau echoed everyone’s sentiments when he drew on his experience of the Trump administration and said, “we will have to wait and see what the President will do”.
The ECB rate decision is the biggest macro event of the session, and apart from Draghi and the central bank’s take on the US tariffs we could be looking at a very similar story. I expect Draghi to toe the line yet again today, especially on inflation and the guidance on QE. The current stance is that inflation will rise gradually, and that the ECB is ready increase QE in both size and duration if needed. There will be no movement in rates, or the QE stance, however I have seen rumblings that we could see the QE term removed and replaced with a “ready to use all tools available” line. Inflation expectations are likely to remain the same.
So, what does this do to the euro?
Well midterm we could see some upside on the back of a potential upward revision on GDP growth, however there is headline risk to EURUSD and EURGBP on the back of any tariff and global trade war comments. The key point will be if the language changes around QE, this could well signal that the ECB are less willing to increase both amount and length, which would mean that we are staring the path to tapering.