EUR/USD – BEARISH BIAS – (1.2750-1.3150).
EUR/USD has just broken the 1.3000 level following the surprise decision of the ECB to both cut all the key official interest rates by 10bps and to formally launch an ABS/Covered bond QE program in October. While we do not know the formal size of the QE program, President Draghi signalled that the ECB’s balance sheet would head back to the peak set in mid-2012. That implies a fairly substantial asset buying program coupled with the TLTRO program which will begin on 18th September.
The next key event will be the jobs report tomorrow from the US and we suspect that this will help to reinforce the divergence in monetary policy that is likely to evolve through the remainder of this year and in 2015.
We have 1.2750 as the bottom of the range for the week ahead – this level is the low from July last year and would be achievable if the non-farm payroll report prompts any kind of shift in expectations of Fed rate increases being sooner than expected. The best we could hope for on the upside would be a return to the level traded prior to the ECB announcement – but that seems highly unlikely at present.
BTMU