Euro's false negative reaction

Forex News and Events

What happened at yesterday’s ECB meeting? (by Yann Quelenn)

At yesterday’s ECB meeting, investors were expecting Mario Draghi to announce an extensions of QE beyond March 2017. No clear views were offered yesterday by Draghi but did hint at the extension of bond purchases. The dovish view still prevails and the tapering of the QE program does not seem even close. We maintain our view that QE will be extended and the amount purchases of €80 billion a month should remain unchanged for some time.

It appears very clear to us that the ECB December meeting will be the key meeting of this year. In order not to bring any further turmoil to the market, we believe that policymakers chose to opt this month for the status quo. It is also worth noting that Draghi is probably satisfied with the EUR/USD level which is now stalling below 1.10. This largely benefits Eurozone exporters and is bringing some relief to ECB officials. 

Eurozone inflation rate remains very low at 0.4% and also well below the inflation target of 2%. It cannot be said that the ECB program has been efficient so far. Indeed, no one can say that the Eurozone economy has been stimulated knowing that growth remains somewhat sluggish. In terms of interest rates, we hold our dovish view even though we believe that there is little room for other rate cuts. From our vantage point, rates cannot go much deeper into negative territory or the risk of triggering a bank run will increase. There is no upside to the ECB to add some pressures on the banking sector, which is already at stake. Some major banks such as Deutsche Bank or Commerzbank are making the headlines and this would only increase their difficulties.

Euro’s false negative reaction

Interestingly, despite the fact that Mario Draghi provided no clear indication that additional easing is certain, today the EURUSD is -1.0% lower than prior to the ECB meeting. Our view is that the market is not listening to the ECB. They hear the words but show no comprehension of their meaning. Over the past ten years, markets have become so conditioned to get currency debasing easing every time that the inflation outlook deviates from the central bank’s target rate (in this case the ECB’s 2% target). 

Despite Draghi’s growing intellectual conflict, broader public disagreement on the effectiveness of the current monetary policy mix and the negative effect of distortion in financial markets, markets are still expected more easing. Financial markets are simply projecting that the ECB must do something and that the action will be euro-negative, as the recent experience with the BoJ has shown currency traders. However, we see central bank policy coming to a reflection point. Gone are the days when policy was expected to drive growth but has now shifted back to being a tool to support growth dynamics. Negative rates were just a step too far for most people. It is only a matter of time before central banks accept the fact that they are not in total control with Victorian-era precision and realize that the cost of doing something does not outweigh the cost of doing nothing. 

In 2017, financial markets will need to learn to live in a world where central banks no longer pretend to offer economic salvation.

The Risk Today

Peter Rosenstreich

EUR/USD's bearish momentum continues. Selling pressures are important. Resistance can be given at 1.0822 (10/03/2016 low). Hourly resistance can be found at 1.1058 (13/10/2016 high). Key resistance is located far away at 1.1352 (18/08/2016 high). Expected to further decline. In the longer term, the technical structure favours a very long-term bearish bias as long as resistance at 1.1714 (24/08/2015 high) holds. The pair is trading in range since the start of 2015. Strong support is given at 1.0458 (16/03/2015 low). However, the current technical structure since last December implies a gradual increase.

GBP/USD is well located within a symmetrical triangle. Hourly support is given around 1.2185 (lower bound of the symmetrical triangle) while hourly resistance lies at 1.2332 (19/10/2016 high). Key resistance stands far away at 1.2620 then 1.2873 (03/10/2016). Expected to show further increase. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY has successfully bounced off 103.17 low but the pair fails to hold above resistance at 104.32. In addition, a break of hourly support at 102.81 (10/10/2016 low) is needed to confirm underlying pressures. Key support can be found at 100.09 (27/09/2016). Hourly resistance can be found at 104.64 (13/10/2016 higher). Expected to further decline as selling pressures around 104.15-30 seem important. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF has finally broken resistance area between 0.9919 (07/08/2016 low) and 0.9950 (27/07/2016). The pair remains on a bullish momentum since September 15. Hourly support is located at 0.9733 (05/10/2016 base) then 0.9632 (26/08/2016 base low). Expected to see continued increase. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.