EUR/USD (1.3905) By changing the its evaluation of the risks for eurozone growth and inflation to the “downside” and “balanced”, respectively, the ECB’s Governing Council precisely matched market expectations. What Jean-Claude Trichet did not do in yesterday’s post-meeting press conference, however, was to draw the conclusions that traders believed the re-evaluation warranted – namely a clear signal that the tightening cycle was over and that rate cuts were in the pipeline. Instead, Trichet rigorously defended the ECB’s inflation track record, in other words, reminded the assembled journalists of the wisdom of the Bank’s past decision-making and, by implication, the propitiousness of its present policy. He even used the Governing Council’s code-word expression, ‘closely monitoring’, which typically precedes ‘strong vigilance’ by one month and a rate hike by two. Traders, more pre-occupied by growth concerns than by inflation, took this as a negative sign and sold the euro. However, we suspect that even had the ECB president been more vocally dovish, they would have sold the euro anyway on the prospect of lower rates.
The euro’s steady erosion after the ECB press conference continued right up until the NY close. It has already covered a much of the way to 1.3810, which we still consider to be the near-term risk. Below there, one must even envisage weakness to 1.3630. To the upside today, we look for the first tough supply on bounces to 1.4095.
Market Bias Index
Notwithstanding a massive USD/CHF overvaluation bias, it is notable that the dollar is now generally perceived as the most overvalued major currency.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/09/GDPBD00000192359.pdf
Deutsche Bank
Fixed Income Research – Global