EUR: Drivers & Trading Strategy For Next 3 Months

[thenews]

Over the next three months or so, EUR trading will likely depend on three factors: i) efficacy of the ECB policy package, ii) external environment, especially Fed policy and risk sentiment, and iii) ECB willingness to ease further, including rate cuts, when necessary.

Based on these three factors, EUR could take four possible paths; we think a gradual depreciation of EUR/USD thanks to better risk sentiment and Fed rate hikes is now more likely than before the ECB meeting.

We judge the ECB policy package shifting to credit easing from rate cuts to be risk-positive, which should gradually depreciate EUR against USD.

Short-term EUR appreciation due to negative external developments cannot be ruled out, but under this risk scenario, repetition of the EUR cycle between the December and March meetings (EUR squeezing higher once and ECB easing expectations kicking in) is more likely than the scenario of ECB inaction continuing to push EUR higher (this remains a tail risk scenario). We would expect this to be a sixmonth cycle though, rather than a three-month cycle.

Thus, we think an optionalised EUR/USD downside position, with a moderate target, is the position to have.

[thenews]

EUR/USD: Euro Breaks $1.13 After Euro Zone's Inflation Data According to the latest Eurostat release, the euro zone's CPI for February beat consensus of a 0.0% print month-on-month and rose 0.2% after the previous -1.4% decline, but the yearly measure fell by -0.2% after the previous 0.3% advance. The core indicator accelerated a notch from 0.7% to 0.8% year-on-year.

The single currency jumped some 10 pips after these figures and it managed to post fresh daily highs around $1.1315, booking an intraday gain of 0.80% during the London session.

Yesterday was a very busy day, with loads of US data and more importantly the Federal Open Market Committee (FOMC) meeting. The Federal Reserve (Fed) left the Fed funds rate unchanged at 0.5% at its March meeting and cut the 2016 GDP outlook to 2.2% from 2.4%, while the 2017 projection was lowered to 2.1% from 2.2% in December.

In addition, the PCE inflation projection for 2016 was also lowered to 1.2% from 1.6% previously and for 2017 it was kept at 1.9%.

read more