EUR Has Failed To React To Additional ECB Easing

[thenews]

...We anticipate that: The ECB will revise downward the 2016 inflation forecast to -0.1% from 1.0% and the 2017 forecast from 1.6% to 1.5%, and step up the pace of monetary accommodation by cutting the deposit rate by 10bp and expanding the pace of the public sector purchase programme (PSPP) by EUR10bn per month.

The European rates market is pricing in further monetary accommodation from the ECB, broadly in line with our economists’ base case view. By contrast, EUR/$ has traded in a range between 1.0796 and 1.1323. Although it is challenging to assess the extent to which ECB easing has been priced in the EUR, in our view the currency has failed to react in any sizeable way to the additional monetary stimulus that ECB President Draghi put on the table on January 21. Indeed, EUR/$ is trading slightly above its level on the day of the Governing Council meeting and, over the past month, changes in EUR/$ have tracked quite closely movements in 2-year USD rates, rather than movements in EUR rates, reflecting the turn in the US data.

This is remarkably different to what has happened in the past, such as when President Draghi had pre-announced QE at the Jackson Hole conference in August 2014 and, more recently, after the September 2015 ECB meeting. After the disappointment in December, short positions in the currency have not been an appealing trade to express the ECB’s easing signals. EUR net shorts stand at their lowest level since June 2014 and have declined to $6.5bn from $22bn at the beginning of the year.

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[thenews]

EUR/USD Weekly Outlook: Market Awaits ECB to Set Direction The EUR/USD pair failed to test the ultimate support of $1.08 and returned to $1.10 instead, suggesting there are no extremely dovish expectations from the European Central Bank (ECB) meeting and there is a chance that the central bank will disappoint again.

The European calendar is filled with data in the coming week, although most are minor indicators with little impact expected on the euro. On Monday, German factory orders for January are expected to improve modestly from December's levels.

Tuesday will bring industrial production from Germany and Spain, with the euro zone's GDP print for the fourth quarter released shortly afterward. The quarterly change should stay at 0.3% in the fourth quarter, while the yearly print is expected to remain at 1.5%.

On Thursday, the anticipated ECB meeting is due, where the central bank is expected to ease monetary policy further. However, the ECB must be very careful not to disappoint markets as it did back in December when easing was announced, and mitigated by a strong rise in the euro.

"The euro picked up strength on Friday after a report suggested a lack of consensus at the ECB before its policy meeting next week. The report from MNI cited ECB sources as saying the central bank was ready to make further cuts to the deposit rate but that there was indecision over other unconventional measures that could be taken to address the ongoing low inflation," Jasper Lawler, market analyst at CMC Markets UK, said in an email on Friday.

Volatility will be most likely extreme after the decision, but it is impossible to predict the reaction as the consensus about the steps will not be unanimous. Therefore, chaotic trading may result.

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