The last week proved to be a mixed bag of results, as the European Central Bank’s (ECB) decision to begin bond purchases from March and the movement in the US Treasury yields was well anticipated. However, recovery in the GBP/USD pair fell approximately 50 pip short of the expected level, while the view on USD index failed as it extended rally to 95.00 levels.
Our reports under macro scan titled “US Treasury yields set to weaken further, GBP/USD likely to test 1.5260â€(our macro scan report dated Jan 20th.) and “USD Index – risk of correction to 92.00-91.50 levels in short-term†(our macro scan report dated Jan 21st.), were anticipating that the ECB would fail to surprise markets with respect to the size and duration of the QE, thereby triggering a bout of profit booking in the USD. However, the ECB’s 1 trillion Euro big bazooka surprised markets, thereby pushing EUR to 11-year lows against the USD.
Furthermore, the drop in the EUR/USD also capped recovery in the GBP/USD pair at 1.5213 – approx 50 pip short of the expected 1.5260 levels, post which cable fell below 1.5 levels.
Moreover, the view on the USD index failed as it was primarily based on the expectation that the ECB would disappoint markets. However, we did mention in the report (our macro scan report dated Jan 21st.), that a surprisingly big stimulus program may push the USD to 94.50 levels.
Meanwhile, the movement in the 10-year treasury yield (our macro scan report dated Jan 20th) was well anticipated. As expected the gains in the 10-yr yield were capped just below 1.96%, post which the yields resumed the fall. Given the yield is back below 1.8%, a downside of 1.62% can still be expected.
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