Euro (EUR) fundamentals Week 04 2019.

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  • ECB (interim) meeting delivered no monetary policy changes. All policy parameters including the wording of forward guidance remained unchanged. Contrary to our expectation, however, the ECB chose to downgrade its assessment of the balance of risks by stating these had moved to the downside (previously “broadly balanced“). This opens the door, in our view, to a downward revision of ECB staff projections and, possibly even a change in the wording of forward guidance at the next meeting on 07 March.ECB kept all options open on LRTO’s; we continue to expect the bank to offer new LTROs by mid-year. With regard to the timing indications of “lift-off”, i.e. the first policy rate hike, Draghi repeated his 13 Dec statement that market pricing showed that markets had understood the ECBs reaction function. Overall, the outcome of ECB meeting was somewhat more dovish than we had expected. The ECB has effectively closed the door for ECB rates “lift-off” under Mario Draghi’s watch. SEB.
  • GBP outperformed in the G10 space supported by a technical break above 1.30 in GBP/USD. While uncertainty related to Brexit remains high, the risk of a ‘no deal’ Brexit appears to be fading, which has improved appetite for GBP. We reckon that the past week’s rally in GBP is fair given that the ‘post Brexit’ outcome distribution for EUR/GBP looks increasingly skewed towards the downside. Momentum is strong and with risks skewed towards the downside for EUR, EUR/GBP could still test lower towards 0.86. Danske.
  • No new policy signals expected from ECB this week, we stick to our three-stage rocket to orbit view for the EUR/USD. The next big move in EUR/USD will be higher on valuation grounds but stress that a rebound is a three-stage-rocket – and Fed ‘on hold’ is only the first stage to orbit. With the break of October 2018 highs justified based on higher long real yield spread, EUR/USD ranges have moved higher with 1.15 now more likely to be the midpoint going forward. As Q1 progresses, we expect the second stage to be reached and 1.20 to be in sight. EUR has shown signs of weakening on a broader scale. In the past few months, the year-on-year appreciation pace has fallen markedly and is now up by only 0.5% y/y (from 10% y/y in October 2018). In our view, a weaker euro is good for the ECB and its narrative. Danske.
  • EUR/USD and EUR/JPY tactical views in the near-term.”EUR/USD has broken out of its 1.13-1.15 range, a move which came as the USD/CNH rate fell and just before the (positive) end of trade talks was confirmed. The euro’s only independent sources of strength are valuation (against the dollar, not in trade-weighted terms), and positioning. It took a long time to break 1.15; it may take a while to break 1.16 too. EUR/JPY retraced neatly to 125 (the May and August lows) and going short here with a stop just above 1.25 looks appealing. SocGen.
  • The Fed may have provided a necessary condition for risk sentiment to stabilise, it is not a sufficient one and we need the global cyclical stance to show signs of a turn and this is unlikely to happen in the very near term. This is a key reason why we continue to see support for JPY, CHF and, to some extent, USD. For EUR/USD, Fed-induced USD strength may be fading for now but risk sentiment and the ECB mean it is still too early for a firm move away from 1.13. Danske.
  • As the UK parliament re-ignites the Brexit deal talks, EUR/GBP is likely to remain ‘boxed’ in the 0.8800-0.9060 range until further clarification with a prominent risk that the process drags out. Danske.
  • EURUSD should strengthen as the impact of the US fiscal stimulus fades. We are assuming that by the end of the year the Eurozone and the US will be growing at potential and monetary policies will start converging. Higher Eurozone inflation is what could really surprise markets. Back to equilibrium. Expecting growth in the Eurozone and the US to be at potential and ECB and Fed monetary policies to start converging by the end of the year, we are forecasting EURUSD to move back to its long-term equilibrium. We expect EURUSD at between 1.20 to 1.25 this year and at 1.25 by the end of the year.  BofAML.

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ECB has turned dovish and will likely prefer a weak currency going forward. With little signs of rate rises by ECB, EUR is poised to continue lower in the medium term.

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