EUR USD (1.2380) Yesterday’s ECB rate decision kick-started the euro’s latest sell-off. Although the policy shifts were small, respectively, 25bp off the main policy rate and the deposit rate, they nonetheless overstepped market expectations; the average forecasts were for 10bp or 15bp changes. As a consequence, investors saw the decision as reflecting greater ECB concerns about the eurozone outlook and became more risk-averse. Most of the euro decline was due to across-the-board US-dollar strength. So, although deposits at the ECB will no longer accrue interest, they might be just as numerous because of the heightened risk-aversion. In the near-term, at least, the aggressiveness of the policy might have undermined its effectiveness. From a broader perspective, though, the ECB step demonstrates the ‘conditionality’ highlighted by Mario Draghi. He certainly believes the emphasis has changed in EU policymaking – S&P too. The rating agency has even suggested that the ‘tide may be turning’. So one could expect further ECB measures in future. And, once the knee-jerk risk-aversion subsides, even its latest policies could bear fruit. The euro undercut 1.2510 and lost all the advantage gained from last week’s downside false break. It has so far held at our 1.2360 support but, if it is broken, one must expect further erosion to 1.2220/40. A remarkable amount of yesterday’s trading volume was executed near the highs of the day (1.2540). So, in case of a rebound, there might not be too much leftover supply ahead of there.
Click here to read the full report: Daily Forex 07.06.12
Deutsche Bank