On Thursday, the euro initially declined further as investors prepared for aggressive ECB easing. They didn’t want to be euro long going this hyped ECB meeting. The euro spiked already higher just before the ECB announcement on rumours of an unchanged decision. These rumours proved wrong, but the ECB decision didn’t stop the ‘new’ market dynamics anymore. The ECB ‘under-delivered’ as it ‘only’ cut the deposit rate to -0.3% and as it didn’t expand the monthly asset purchases. This triggered a massive repositioning in bond markets and in the currency market. EUR/USD traded in the 1.0540 area just before the ECB announcement. In several waves it was squeezed higher to the 1.0980 area late in the US trading session. The pair closed the session at 1.0940 (1.0615 on Wednesday). The less-easy-than-expected ECB policy stance also hurt global equity markets. This weighed on USD/JPY. The pair closed the session at 122.61 (from 123.24). The comments of Yellen before the JEC were mostly in line with her assessment on Wednesday and had only a limited impact on currency trading. The ECB also caused a marked repositioning in the smaller currencies on the sidelines of the EMU. The likes of the Swedish lost quite some ground as the risk for a flood of euro liquidity to those currencies was less than feared.

This morning, the post-Draghi repositioning also leaves its traces on the Asian market. In line with the US, Asian equities trade with substantial losses of up to 2%. EUR/USD and USD/JPY maintain most of the post-Draghi repositioning, trading currently around 1.0925 and 122.60. respectively. The likes of the Aussie dollar traded very volatile in the wake of the ECB decision. The Aussie dollar closed yesterday’s session higher on global dollar weakness (which was also a positive for most commodities). However part of these gains are reversed this morning as sentiment on risk remains negative.

Today, there are several second tier eco data on the agenda, but two themes will set the tone for global currency trading. Firstly, all lot of investors will still have some repositioning to do in the wake of Yesterday’s ECB decision. The ECB-‘under-delivering’ market expectations is in theory a positive for the euro. However, we are not convinced that yesterday’s forceful correction will have to go much further. Interest rate differentials at 2-year between Germany and the US have declined from the 140 area to 126 currently. This already quite a substantial adjustment. With the ECB deposit rate at -0.3%., the euro will continue to face an impressive interest disadvantage. The market focus will now gradually turn for the ECB to the US and the Fed. US payrolls growth is expected to decline from 271 000 to 200 000, which is still a lofty level. We see only slight downside risks. In such a scenario, a Fed interest rate hike won’t be questioned anymore.

The debate will shift to the pace of further Fed tightening. In this respect, wage growth and the development of inflation will play a decisive role. With a Fed rate hike more or less cemented, the dollar will preserve a substantial interest rate support. Even after yesterday’s ECB’s failure to meet market expectations, policy divergence at some point might still have some role to play. Admittedly, from now it will have to come from USD strength, rather than from euro weakness. We will recalibrate our strategy after the payrolls. Currently we look out where the current repositioning will stop. With short-term interest rate differentials still very much in favour of the dollarand with the Fed embarking for an albeit gradually hiking cycle, we are inclined to stay EUR/USD negative once this repositioning is over. The 38% retracement from 1.1714 to 1.0524 stands at 1.0979 and is currently under test. A previous range bottom/break down area comes in at 1.1087. In case of a decent payrolls report, this might become a first tough resistance going into the Fed policy decision. In case of a poor payrolls report, the correction has possibly some further to go.


EUR/GBP and cable rebound on ECB decision.

On Thursday, the fall-out from the ECB decision drove sterling. Cable hovered in a tight range mostly slightly below 1.4950, but jumped higher on ‘dollar weakness’ after the ECB decision. The pair closed the session at 1.5144 from 1.4951. Evidently, cable underperformed EUR/USD in the post-ECB repositioning. EUR/GBP tested the 0.7250 area and closed the session at 0.7223 (from 0.7099).

Today, The UK calendar contains only the UK car registrations. So, sterling trading will remain at the mercy of global market developments. As is the case for EUR/USD, the jury is still out on how far the current repositioning will go. A less accommodative ECB over time might make it easier for the BoE to raise rates if data would allow them to do so. It is still early days, but in that scenario, one should expected a real long-term trend reversal in EUR/GBP. Of course, at this stage it is too early to bet on such a scenario. In a day-to-day perspective, we look out how the 0.7250 resistance area works out .

This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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