EUR/USD (1.4060) Jean-Claude Trichet’s admission almost a fortnight ago that the risks to medium-term price stability were “under study” at the ECB was the opening shot to a still blossoming market discussion about the future path of eurozone interest rates. The ECB’s study could, of course, yield any number of different conclusions. It could, for instance conclude that the upside risks are unchanged. It is more likely, given the easing of commodity prices and headline inflation that those risks may have diminished somewhat. However, in the medium-term time horizon at which the Bank operates, it is hard to see how those risks could have changed materially since the last rate hike in July. It is also not part of the ECB’s philosophy to assume that slowing growth will automatically bring inflation down. Still, this hasn’t prevented market commentators from forecasting an about-turn in monetary policy. A ‘neutral bias’ is not sufficient for some analysts, many are calling for the announcement of an ‘easing bias’ and a few see the chance for a rate cut as early as next month.
This creeping dovishness in the market might explain some of the euro selling yesterday. It was well capped despite the early rally that followed the news of the judgement of Germany’s Constitutional Court on EU bailouts. We continue to highlight a near-term risk down to 1.3810 (1.3630). As before, to achieve a stabilisation now, the euro must climb beyond 1.4335. Earlier supply stands at 1.4215.
Market Bias Index
Capitulation will have meant that fewer engagements are reflected in the perception of CHF undervaluation now. However, even for those who think the SNB policy will fail, the level CHF 1.20 is a powerful reference point.
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Deutsche Bank
Fixed Income Research – Global