Limited EUR damage from ECB rate cut expectations
EURUSD remains confined to a familiar 1.30-1.31 range. The solution to the Italian Presidential election impasse should facilitate the formation of a grand coalition government with a new round of negotiations to start shortly. Thus, on the EURpositive side, Eurozone bond markets have extended their recent strength – Italian 10y yields are trading around 4.1% while Spanish 10y yields are at 4.5% – both at the lowest levels since late 2010. On the EUR-negative side, comments from ECB’s Asmussen and Coeure echoed earlier remarks from Weidmann and Draghi in highlighting that there was scope for a rate cut if conditions warranted such a move. Both Coeure and Draghi said the ECB hadn’t seen an improvement in the economy in recent weeks. Since our European economists expect a weaker April composite PMI reading (46.3 from 46.5) the chances of a refi rate cut could thus be boosted further. However, in our view, EURUSD dips below 1.30 present buying opportunities. First, any moderate ECB easing (i.e. one not involving negative deposit rates or QE) would still underwhelm relative to the aggressive balance sheet expansion by the BoJ and Fed. Second, the tightening in the peripheral spreads in recent days suggests EURUSD looks attractive relative to the risk premia. Our technical analyst suggests EURUSD may retreat to the 1.2851-78 area (a higher low from early April) followed by a recovery towards 1.3200.
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BNP Paribas