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5 Jun 2014
EUR/USD ready for action with ECB poised to act
FXStreet (Edinburgh) - The big day has finally come for the euro! Arguably the most significant ECB meeting in recent memory will grab all the attention today, as well as the subsequent press conference by President Mario Draghi.
As one can easily infer following the steep pullback from yesterdays highs, just pips below the psychological 1.4000 handle in early May to the current levels around 3-month lows, ‘something’ is already price in by the markets.
According to market consensus, analysts and gurus, a 10-15 bp cut in both the refi rate and the deposits rate (thus taking it to the negative territory) would be vox populi. However, and this vision is shared by the vast FX community, that would not be enough. And here is where speculations of potential easing measures have been mounting in the last month. In the context where the euro area is immersed into, a ‘neat’ rate cut would be innocuous. A companion for such a measure, and with the aim of boosting the provision of credit across the 18-nation bloc, the European Central Bank, should (could? would?) implement a new and longer-term LTRO and/or stop the sterilization of the Securities Market Purchases (SMP), just to mention the favourite ones.
Market participants should not forget that the ECB’s toolbox might hide some other measure/s not considered or known of so far, hence expanding the spectrum of alternatives. The idea of some sort of Quantitative Easing a la Fed faded until the point that it is now deemed as highly unlikely.
A prima facie, the scenario mentioned above would have distinct EUR-negative implications. It could automatically lead to a sustained break of the 1.3600 floor, triggering a domino of sell orders, thus accelerating its pace to the 1.3500 handle and maybe lower.
All of these expectations surrounding the ECB, and whatever it finally announces beg a question: Can the central bank stay put once again? After all, this calamitous drop of around 4 big-figures qualifies for ‘verbal intervention’, does it not? If President Draghi and the Governing Council wanted a lower exchange rate back to late April-early May, well, they now have it.
What about the other face of the coin?
The euro area keeps its recovery alive, albeit at a snail-pace. Economic indicators have been improving in recent months; in fact, the only real disappointment was yesterday’s GDP figures for the first quarter.
Economic sentiment is on the rise and consumer sentiment is hovering over multi-year peaks. Unemployment reverted back to the upside and surprised investors falling to 11.7% in April. Inflows into the euro bloc keep building up as reflected by the persistent current account surplus. All these factors are, on the contrary, supportive of the euro. If the ECB decides to boost credit conditions across the most needed economic sectors, it will eventually echo in lower unemployment and better economic growth prospects for the region as a whole. And that will be most welcomed by investors. And that will eventually boost… the EUR?
All in all, all indications lead to the ECB delivering. If only for the sake of its credibility.
As one can easily infer following the steep pullback from yesterdays highs, just pips below the psychological 1.4000 handle in early May to the current levels around 3-month lows, ‘something’ is already price in by the markets.
According to market consensus, analysts and gurus, a 10-15 bp cut in both the refi rate and the deposits rate (thus taking it to the negative territory) would be vox populi. However, and this vision is shared by the vast FX community, that would not be enough. And here is where speculations of potential easing measures have been mounting in the last month. In the context where the euro area is immersed into, a ‘neat’ rate cut would be innocuous. A companion for such a measure, and with the aim of boosting the provision of credit across the 18-nation bloc, the European Central Bank, should (could? would?) implement a new and longer-term LTRO and/or stop the sterilization of the Securities Market Purchases (SMP), just to mention the favourite ones.
Market participants should not forget that the ECB’s toolbox might hide some other measure/s not considered or known of so far, hence expanding the spectrum of alternatives. The idea of some sort of Quantitative Easing a la Fed faded until the point that it is now deemed as highly unlikely.
A prima facie, the scenario mentioned above would have distinct EUR-negative implications. It could automatically lead to a sustained break of the 1.3600 floor, triggering a domino of sell orders, thus accelerating its pace to the 1.3500 handle and maybe lower.
All of these expectations surrounding the ECB, and whatever it finally announces beg a question: Can the central bank stay put once again? After all, this calamitous drop of around 4 big-figures qualifies for ‘verbal intervention’, does it not? If President Draghi and the Governing Council wanted a lower exchange rate back to late April-early May, well, they now have it.
What about the other face of the coin?
The euro area keeps its recovery alive, albeit at a snail-pace. Economic indicators have been improving in recent months; in fact, the only real disappointment was yesterday’s GDP figures for the first quarter.
Economic sentiment is on the rise and consumer sentiment is hovering over multi-year peaks. Unemployment reverted back to the upside and surprised investors falling to 11.7% in April. Inflows into the euro bloc keep building up as reflected by the persistent current account surplus. All these factors are, on the contrary, supportive of the euro. If the ECB decides to boost credit conditions across the most needed economic sectors, it will eventually echo in lower unemployment and better economic growth prospects for the region as a whole. And that will be most welcomed by investors. And that will eventually boost… the EUR?
All in all, all indications lead to the ECB delivering. If only for the sake of its credibility.