EUR/USD setting multi-year low as start of QE looms

On Wednesday, sentiment on risk turned more cautious, but EUR/USD remained under pressure even as EMU eco data showed signs of improvement. The pair even touched a new multi-year late in Europe. USD/JPY held up fairly well. The loss of momentum in equities doesn’t affect the dollar much as US yields generally remain USD supportive. The Fed Beige book didn’t bring any high profile news. The scenario of moderate growth remains intact.

Overnight, Asian equities trade mixed. Japanese stocks show moderate gains, probably as USD/JPY stays well supported. The pair is holding in the high 119 area. Even so, the sharp decline in EUR/JPY at some point might become a competitive disadvantage for Japanese companies. Chinese equities struggle as the government lowered the 2015 growth target to 7.0% from 7.5%. The Yuan trades slightly stronger against the dollar even as the PBOC set the reference rate for a slightly weaker yuan. The euro remains under pressure going into the ECB policy meeting. EUR/USD is setting new multi-year lows below 1.1050 at the moment of writing. The dollar remains well bid across the board, but this is in the first place euro weakness.

Today, there are only second tier eco data in Europe, while the US data (see calendar/Fixed Income) are only of intraday significance for USD trading. The focus will be on the ECB press conference. ECB president Dragh will probably elaborate on the technical implementation of QE. The ECB will also publish new growth and inflation forecasts for the period 2015/2017. We look out for the impact of the decline in oil prices and the weaker euro on growth and on inflation going forward. Especially the forecast for 2017 (the policy horizon of the ECB) is interesting. If growth is predicted strong and inflation returning to target, markets might start pondering how far the recent QE trade (sharp decline of the euro and of European bond yields) has to go. In theory, it could (temporary) slow the decline in EUR/USD, too. However, for now, we don’t preposition for big correction on what might happen in a two-year horizon at a time when the QE still has to start. The forecast is a (temporary?) risk factor. USD/JPY remains well bid even as equities shift into a lower gear and as the Beige Book was a bid soft. The day-to-day momentum remains constructive, but the topside will become more difficult north of 120. After the ECB press conference, to focus will turn to the payrolls and to the USD side of the story.

The Technical picture for the EUR/USD cross rate turns further negative as the pair dropped below the previous cycle low. On the downside, next support is seen at 1.0765 and 1.0504 (2003 lows). The pair is moving into oversold territory, but it is not in an extreme position yet. On the topside the 1.13/1.1390 area is a first reference short-term. A rebound north of 1.1534 would question the established downtrend. We maintain a EUR/USD sell-on-upticks approach but still hope for higher levels to add EUR/USD short exposure. For USD/JPY the key 120.83/121.85 resistance stayed out of reach for now. The pair holds well within the 115.57/121.85 trading range. A sell-on-upticks approach within this range is preferred.

EUR/GBP doesn’t join the EUR/USD decline

Yesterday, sterling didn’t show a strong momentum. The euro was under pressure from the start in Europe and this weighed also on EUR/GBP. The February UK services PMI was reported slightly below the consensus, but remained at a decent level (56.7 vs 57.5 expected). EUR/GBP regained a few ticks upon the publication of the report. The rebound was limited but later EUR/GBP still decoupled for the broader decline of the euro. The pair basically held in the 0.7245/65 area. Cable finally was dragged lower by the decline in EUR/USD, too. The pair closed the session at 1.5265, almost one big figure lower from the 1.5361 close on Tuesday.

Today, the BoE holds a policy meeting. However, as no policy change is expected, the BOE most probably won’t give any information on its policy assessment or on its view on the UK economy.

Longer term, we maintain a sell-on-upticks approach for EUR/GBP, especially as we expect the euro to stay under moderate pressure as QE is implemented. Short-term, sterling apparently needs a breather after the recent rebound, both against the euro and the dollar.