ECB delivers, but Draghi propels euro sharply higher

On Thursday, the ECB policy decision dominated trading. Immediately after the policy announcement with lots of new measures, European bond yields and the euro declined substantially. However, this decline was abruptly reversed, as the ECB president said he didn’t see a need for further rate cuts and as markets doubted the other measures would help the ECB much in reaching their objectives. EUR/USD rebounded forcefully and jumped well north of the pre-announcement levels. EUR/USD closed the session at 1.1177 (compared to 1.0999 on Wednesday). USD/JPY initially declined in line with USD/EUR, but it found a bottom as US stocks reversed most initial gains.

This morning, Asian equity markets react in a guarded way to yesterday’s ECB-induced volatility. The rise of the euro and the prospect that Europe is nearing the end of its rate cut cycle diminishes the risk of a race to the bottom in currencies. This is positive from a global perspective. Yesterday’s USD decline allowed the PBOC to fix the yuan strong at USD/CNY 6.4905 vs 6.5127. The strong yuan at least partially supported market stability in Asia. Major Asian equity indices trade with modest gains. Commodities also rebounded after yesterday’s setback. USD/JPY trades in the 113.50 area, off yesterday’s low (112.61). EUR/USD preserves most of the gains and trades around 1.1170.

Today, the eco and event calendars are empty. So, market will ponder the impact of yesterday’s ECB action and Draghi’s comments. The ECB deposit rate cut by ‘only’ 10 bps to -0.40% and suggestion the rate cycle is done pushed ST European yields higher. The 2-year US-German rate differential narrowed from about 145 bps to about 138 bps. A market repositioning, as it occurred yesterday, takes most often more than one day. So, some further fall-out today is likely. In a daily perspective, the euro can stay relatively strong. That said, we don’t expect that yesterday’s move is already a real game changer for euro trading. Extremely low/negative interest rates will remain in place for a very long time. This should still cap the topside of the euro. A the same time, the ECB nearing the end of its rate cut cycle gives the Fed and the other central bankers of stronger economies a bit more room to normalize policy, if deemed useful. This keeps the dollar well support for now versus the euro and other currencies

Of late, we advocated sideways EUR/USD trading within the 1.1193/1.0810 range. The top of this range was extensively tested yesterday and remains under pressure. Some further repositioning in favour of the euro might be on the cards short-term. 1.1376 is the next important support on the charts. For now, we assume that this level will hold, unless the news flow from the US would turn really negative. We look out for an EUR/USD topping out process. USD/JPY perfectly holds within the 110.99/114.87 sideways consolidation pattern. The pair still shows no clear trend, but it looks like the downside is well protected. This is partially due to market fears for BOJ action in case of a sharp rise of the yen. At the same time, the dollar might perform rather well in the run-up to next week’s Fed meeting.


EUR/GBP: downside test rejected on euro strength

The EUR/USD swings after the ECB policy decision also filtered through into cable and EUR/GBP. Both cross rates initially declined. Cable tested the 1.4120 area. EUR/GBP dropped temporary below the 0.7690 support. However, the declines in cable and EUR/GBP were also reversed after the ‘no need’ comment of Draghi. EUR/GBP rebounded sharply as EMU interest rates rose. EUR/GBP closed the session at 0.7825, sharply higher from Wednesday’s close at 0.7737. Dollar weakness also propelled cable back higher later in the session. The pair finished the session at 1.4281 (from 1.4217)

Today, the UK trade balance data and the construction output for January will be published. The trade deficit is expected to widen again. Construction output is expected soft at 0.2% M/M and 1.6% Y/Y. We don’t expect the data to given sterling support. However, the focus for sterling trading will be on the global, post-ECB developments.

Last week, sterling rebounded as the Brexit-fears moved to the background, but the rebound slowed at the end of last week. For cable, the hypothesis of a bottoming out process remains in place. For EUR/GBP the picture is damaged by yesterday’s overall euro rebound. As is the case for EUR/USD, we look for signs of a topping out process in EUR/GBP. The medium-term technical picture of sterling against the euro remains negative as EUR/GBP broke above the 0.7493 Oct top. Short-term, EUR/GBP tested a first support at 0.7696 last week and this area was temporary broken yesterday. However, the test was rejected. 0.7652 is now the first important level on the downside.

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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