Dovish Setup - ECB & BOE and EU Summit

There’s been much noise on the Euro in recent days, perhaps the loudest from France’s President, Francois Hollande, who said that “a monetary zone must have an exchange rate policy or else it ends up being subjected to a rate that does not fit with the true state of the economy.” How do you say currency manipulation in French? As the global currency wars heat up we note our currency outlook below going into this Thursday’s ECB and BOE policy rate decisions and the beginning of the European Union Summit.

  • ECB Meets: Thursday the ECB’s governing council convenes. We expect no change to the main interest rates. This position is grounded in recent data that is supportive of an “accommodative” hands off approach from Draghi – CPI came down 20bps to 2.0% Y/Y in JAN, exactly at the ECB’s targeted level; PMIs across the region looked broadly better, and importantly showed improvement in the Eurozone average and in Germany; and while the unemployment rate remains nominally high (10.7%), it saw no increase in the DEC reading. We think investors are beginning to price in much of the bad ‘crisis’ news, in that case what’s left in play is a long runway of slow, low growth and unexpected sovereign/banking flair-ups across the periphery.

We see a heavy immediate TERM resistance level in the EUR/USD around $1.36/7 and intermediate term TREND support at $1.31. 

 

As we continue to show in our research, CFTC data shows decidedly that market participants have anchored on Draghi’s all hands on deck approach to save the common currency via the introduction of the OMT bond purchasing program in early August 2012. While we don’t expect this momentum to erode materially, we do think that the cross will fade at our resistance level as the underlying data in the region is still coming off very low levels of improvement and a muted outlook.

 

Dovish Setup - ECB & BOE and EU Summit  - bb. eurusd

 

Dovish Setup - ECB & BOE and EU Summit  - bb.cftc

 

  • BOE Meets: Thursday the BOE convenes. The BOE is widely expected to keep its current policy stance, however former MPC member John Gieve suggested that he sees a “substantial chance” that the Bank will expand monetary policy further due to weakness in the economy. Remember that the final UK Q4 GDP came in lower than expectations on a Q/Q basis -0.3% (exp. -0.1%) and a Y/Y basis 0.0% (exp. +0.2%), which could encourage a step-up in action. However, with CPI currently running at 2.7% Y/Y (above the 2% target) the Bank must also be careful to not stoke more inflation pressures through monetary financing. Should we see even a hint of acceleration in asset purchases we’d expect perversely for the GBP/USD and GBP/EUR to run higher.

 

  • EU Summit: European politician meet this Thursday and Friday to agree on the EU's 2014-2020 budget, the so-called multi-annual financial framework (MFF). We’d suggest you don’t hold your breath that leaders will reach a unanimous agreement. Talks were suspended at the last summit on 22-23 November and will now pick up from that point. The agenda is to find a budget for growth, however this time, we’re following UK PM Cameron’s call for a referendum on the country staying or leaving the EU – this in and of itself should bring more disunity to the table. Herman van Rompuy has said that the budget should focus on jobs, innovation, and research and would like to see that spending on competitiveness and jobs represent more than a 50% increase from the previous budget period of 2007-2013. While we do not expect a unanimous decision, one crafted to throw heavy funding at job creating could put further support in the cross as the region slowly repairs growth.  As always, the devil is in the details.

Matthew Hedrick

Senior Analyst


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