EUR USD (1.4490) Jean-Claude Trichet delivered yesterday what the majority of market participants had come to expect by saying ‘strong vigilance’ will be needed to curb upward price pressure. The euro sold off on what is generally thought to indicate an imminent rate hike, reportedly due to ‘buy the rumour sell the fact’ dynamics. However, we suspect that traders had already anticipated this selling activity on the previous day, leaving the reasons for yesterday’s EUR/USD correction open to interpretation. The ECB president cautioned that there is presently no medium-term trend for rate hikes, and that the ECB would oppose any rollover deal on Greek debt, either of which could have added to the selling pressure on the euro. Meanwhile, this morning’s Economist analyses a recent speech given by the NY Fed president in a piece entitled ‘Read this speech, then sell the dollar’. The London newspaper reveals that William Dudley sees aggressively easy monetary policy as essential to both the economic recovery, and to the structural rebalancing of US trade away from consumption and more towards export. Mr Dudley admitted it is possible that the US has devalued the dollar though QE, but that other nations should realise the Fed doesn’t make monetary policy for the world. He also suggested that emerging market economies should allow the dollar to fall further.
Although the euro lost some of its upward dynamic, we open an immediate bullish strategy to 1.4775, with the risk-limit set at 1.4460.
Market Bias Index
Perceptions of the euro’s overvaluation versus the US dollar are almost completely diminished as the price nears its ‘breakeven’ value (1.4445). Now the Swiss franc and the yen carry bias over the euro.
Deutsche Bank
Fixed Income Research – Global