Despite a dovish ECB, EURUSD attractive under 1.30
The EUR has been the currency under pressure after comments from the Bundesbank President Jens Weidmann who said that the ECB may cut rates if additional information warrants such a move. Those comments by themselves are not new – the ECB already shifted to an easing bias at the April meeting and said it will closely monitor all incoming information. However, the fact that the comments were made by the most hawkish member of the Governing Council suggests the ECB is quite close to delivering a refi rate cut. Although a cut should weigh on the EUR, this would still be seen as modest easing by the standards of the current Fed and BoJ stance. Thus, as long as the ECB steers clear of more radical measures such as lowering the deposit rate to negative and/or quantitative easing, we see EUR outperforming the USD and JPY. Furthermore, with the convergence of short-term rates already in place, we believe risk premia will be a more important driver for the EUR. Spanish and Italian bond yields remain well capped, while strong Spanish and French bond actions today could boost the EUR. We see EURUSD as attractive below 1.30 and continue to target 1.35 by mid-year.
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BNP Paribas