'Lead up to ECB is likely to prevent EUR/USD momentum' - John Kicklighter, DailyFX

   John
Kicklighter

PROFILE:
• Current Job:  Senior Currency Strategist for FXCM in New York.
• Career: Graduated from the Zicklin School of Business with a Bachelors degree in Finance and Investment. Specialized in combining fundamental and technical analysis with money management.

View profile at FXstreet.com

John Kicklighter is the senior currency strategist for FXCM in New York where he specializes in combining fundamental and technical analysis with money management. John authors a number of regular articles for DailyFX.com, ranging in topics from basic fundamental forecasts for the G10 economies and commodities to more complex subjects like the level of risk sentiment across the financial markets and the carry trade specifically.

John has actively traded since he was a teenager. His experience ranges from spot currency, financial futures, commodities, stocks, and options on all of these instruments for his personal accounts. John graduated from the Zicklin School of Business at Baruch College in New York with a Bachelors degree in Finance and Investment.

Will the ECB introduce QE at the meeting on June 5 to counter low inflation? Would that be a suitable approach in your opinion?

The ECB will definitely go for an unorthodox method of easing (outside of rate hikes), but it is less likely that they attempt a program similar to what the Fed and BoJ are doing. There is an issue of practicality as to what assets they could purchase to conduct the program. Buying assets equally of countries that are still under rescue programs or those that have been supported in the past seems like it would be easy enough. However, that could bring an unwanted stigma and would raise the ire of those not being supported. A purchase of ESM and EFSF bonds has been floated by think tanks, but we haven’t heard too much of that option’s viability from ECB members themselves. Rate cuts, stopping sterilization of bond holdings and perhaps a targeted lending program (SME) is far more likely.

What impact could the withdrawal of BoJ's extraordinary stimulus have on the Japanese economy?

The Bank of Japan has stressed that it is not close to considering the exit plan for its stimulus program. If this were attempted before economic and financial conditions improved, the impact on growth and the exchange rate could be extreme. Merely capping the QE effort to its current pace and size is already proving controversial. In the end, should risk aversion kick in – drawing the yen-based carry trades lower and raising the need for more assistance – an upgrade would likely be pursued.

Does the triumph of fringe parties in the elections to the European Parliament last weekend mean that a significant shift in EU policy is at hand?

A growing representation of anti-Euro and anti-Eurozone parties is not a surprise. Their popularity has built over the past years with the implantation of bailout schemes and fiscal retrenchment to reign in deficits. This just happens to be an opportunity to see these members find a more prominent foothold in the higher political levels. As long as the economy and financial system remains on a course towards recovery, the tension will likely ease and with lower debt levels. However, if there is another economic tumble or market crisis, it will find a population with far thinner tolerance.

The EUR/USD broke below the 200-day level at 1.3625 and briefly fell below 1.3600 on May 28, do you see this is a game changer? What do you expect for the EUR/USD in the short term?

When EURUSD broke below 1.3750, it put a stop on a bull trend and rising wedge that was nearly two years in the making. Turning such a prominent moment when market conditions are not at all conducive to major breakouts – much less reversals – suggests this was a special move. Of course, the ECB’s shift to a proactive easing stance was the source of this move. The question is whether they will push down returns within the Eurozone. If that is the case, they can halt the heavy inflows from the speculative ranks – though not likely those groups looking for diversification. In the short-term, the lead up to the ECB is likely to prevent momentum (even with noteworthy event risk before the policy meet).

Since May 21, the GBP/USD declined nearly 235 pips to test the 1.6700 area; in line of the recent economic data, do you see the cable posting further losses?

Rate expectations have been critical to the pound’s performance in the strong rally over the past 11 months. A substantial premium has built behind yield forecasts and the thereby the sterling. That would suggest that the most reliable way to turn this currency and the cable would be a substantial deflation in BoE yield forecasts. Yet, given the data we have seen and the commentary from policy officials, a more timely hike is a reasonable assumption. More debatable is the pace of tightening after the first move – which is likely to be slow. This balance may limit the depth of any pullbacks. The dollar could also contribute to this progress, but a big upgrade in rate expectations from the Fed would need something serious – like a blowout round of employment data next Friday.