EUR/USD (1.3335) Two new market reference points have come to the surface this week. The first concerns the ECB rate decision where, since the last rate-setting meeting, traders have been contemplating a rate cut. As much as 40bp were priced in as recently as last week.
We poured scorn on this idea: the market has forgotten Mr Trichet’s unique compass needle and is focussed much more on growth than the Bank. The eurozone economy is indeed slowing. The Eurozone Composite Output Index suggested yesterday that it is already in contraction, coming in almost a full point beneath the recessionary cap. However, the ECB will not rely entirely on weakening growth to bring down inflation which is already a full point above target. Those rate cut expectations have been cut in half in the meantime, but even that is too little. The failure of the ECB to move to an easing bias will be perceived as growth-negative and, therefore, as euro-negative. The second reference point concerns Friday’s US jobs number. A relatively upbeat ADP forecast yesterday is lifting expectations for tomorrow and encouraging a ‘risk-on’ sentiment. However, there too, traders seem to have forgotten that the track record of ADP for predicting, at least, the unrevised non-farm payroll is not that good
Our new bearish strategy currently targets 1.2910/60. The earliest good support comes in at 1.3170. To the upside, although it is no longer one of the better supply points, the risk-limit remains at 1.3415.
Market Bias Index
Although the euro is perceived as both under-valued and over-valued depending on the pair, it nonetheless managed the feat of seeing bias shrink practically across-the-board yesterday.
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http://www.easyforexnews.net/wp-content/uploads/2011/10/GDPBD00000194724.pdf
Deutsche Bank
Fixed Income Research – Global