EUR/USD (1.3430) Expectations of an immediate ECB rate cut were trimmed in the hours that preceded yesterday’s rate-setting meeting. As suspected, traders considered any inaction as negative for growth and, by extension, negative for the euro. However, Jean-Claude Trichet’s comments during the conference suggested that although there was no change in the decision, there was a lot of movement in the decision-making. For instance, he no longer described monetary policy as accommodative and raised concerns about growth. The Council apparently discussed the idea of a rate cut, but there was no unanimity. Bank-watchers distilled these comments into one simple conclusion: once Mario Draghi takes the helm of the ECB, rate cuts will swiftly follow.
Although the euro initially slid over one percent, the move didn’t trigger any additional medium-term long-liquidation, as we thought it might. Later, it appears that, like us, short-term bears simply retreated. Admittedly, the news about new liquidity measures and covered bond purchases, as well as news about bank recapitalisation, are only perceived as ‘good’ because the backdrop worsened so dramatically in the meantime. Yet, it was enough to lift the euro to a new day high, even though it didn’t result in any upside follow-through. In any case, as long as the stability hurdle at 1.3600 is not yet cleared, we continue to monitor downside risk – to 1.3170 and 1.2910/60.
Market Bias Index
The ‘risk-on’ rally in the capital markets has served to pull many currency pairs closer to the levels traders are likely to consider ‘fair’. The perception of an overvalued US-dollar, however, remains.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/10/GDPBD00000194869.pdf
Deutsche Bank
Fixed Income Research – Global