Trading The ECB: 'EUR In The Line Of Fire' - Credit Agricole

Ahead today, the main focus will be on the ECB monetary policy announcement and not much seems to be expected although it remains a notion that the President will keep the door wide open for more easing. This seems to be more a function of the disappointing December meeting rather than the underlying data. Indeed, both the Eurozone inflation and real economic data have disappointed of late.

To make matters worse for the ECB, global growth conditions worsened, the oil prices tanked and global financial conditions tightened at the start of the new year. It would take a brave policy maker to ignore the above outlined conditions and risks triggering an unwarranted FX appreciation against the background of still elevated risk aversion and raging global currency war. It would also take a particularly courageous Governing Council member to ignore the latest EUR TWI appreciation.

Indeed, while EUR/USD has been trading in a tight range just below the 1.1000 level this year, the EUR NEER has bounced to levels that in the past forced the ECB to talk down the currency and even cut rates.

Granted, the culprit for the latest sharp EUR TWI appreciation is the beleaguered GBP, which, next to the USD and the CNY, has one of the greatest weights in the index. That said, the ECB staff projections still assume a 10% EUR NEER depreciation (i.e. a drop to the 2015 lows) and stable currency henceforth. Sustained FX appreciation from current levels will therefore increase downside risks to the ECB's growth and inflation forecasts and thus fuel bets on further policy action from here.

The EUR is back in the line of fire and the President need not waste time to highlight the risks associated with the latest FX appreciation. While there is a small risk that the ECB may try to act pre-emptively, the experience from the last few policy meetings suggests that a bout of verbal intervention should remain the preferred course of action. It seems more likely too that further easing measures, if and when such are agreed upon, will be announced in tandem with the updated quarterly staff projections in March or June.

We remain bearish the EUR and believe that current levels for both EUR/USD and EUR/GBP could offer interesting selling opportunities. 

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