The single currency has been capped since Friday’s comments by ECB chief economist and Executive Board member Praet. He stressed that the central bank still has room to cut interest rates should the euro area’s economic recovery falter. Nevertheless, it must be noted too, that Praet did not contradict Draghi. Even if Draghi indicated, that more cuts are unlikely, such a view was based on the assumption that the growth and price outlook improves. Since the ECB eased monetary policy by more than expected, inflation expectations as measured by 5y inflation swaps failed to improve.
It appears that the single currency’s recent appreciation has been preventing price expectations from rising. Even if the ECB wishes to be less driven by markets, it remains to be seen how central bank members will react should inflation expectations fall back close to historic lows.
As a result to the above outlined conditions we remain of the view that EUR upside is limited from the current levels. While we do not exclude that the EUR will reach levels closer to 1.13-1.15, we believe that rallies should be sold.
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