Stay short EURUSD through IFO strength
The German IFO survey is likely to show further improvement today, with our economists projecting a further increase to 15-month highs of 108.1. However, we expect only limited, short-term benefit for the EUR from better numbers. Unlike the datadependent Fed, the ECB has made very clear in public comments that it views continued policy accommodation as necessary despite the improvement in activity in Q3 and that, in contrast to the Fed, the central bank remains biased towards adding rather than removing policy stimulus. ECB President Draghi’s comments Monday in European Parliament provided further confirmation of this stance, and we think recent gains in EURUSD are likely to prompt ECB policy makers to continue to emphasize divergence in policy. The EUR NEER has now reached levels that prompted Mr Draghi to voice concern at the currency’s level in February and such direct complaints may surface again (see chart). We think the move higher in EURUSD after last week’s FOMC meeting has been excessive relative to moves in rate differentials and note that the pair is now looking rich to our STEER™ estimate of short-term fair value. As noted above, we recommended selling EURUSD from 1.3510 this week targeting 1.28.
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BNP Paribas