Trading the ECB with EUR/USD – 3 opinions

The European Central Bank convenes today and would like to refrain from rocking the boat. In our preview, we discussed a potential desire by Draghi to drag the euro down[1]. Can he do that? Here are previews from three banks, taking different approaches to trading the event with EUR/USD.

Here is their view, courtesy of eFXnews:

EUR/USD: Testing A Very Crucial Area Around ECB; Levels To Watch – ABN AMRO

ABN MARO FX Strategy Research notes that EUR/USD has risen above 1.1550 mainly because of narrowing yield spreads (real and nominal) between the US and the eurozone, arguing that the area between the current level up to 1.1714 (previous peak) is a very crucial area for EUR/USD.

“We expect that FX options-related activity will probably dampen the upward move somewhat. But if EUR/USD breaks above this previous high of 1.1714 the technical picture becomes more positive, pointing to much higher levels in EUR/USD,”ABN AMRO argues.

“Up to the ECB meeting on Thursday, it is likely that investors will try to push EUR/USD higher to see how the ECB will react to this new reality.

1- We expect Mr. Draghi to be dovish and this should limit the upside in EUR/USD or it could even trigger some profit taking on long euro positions.

2- If, however, Mr Draghi is not dovish or seems unmoved by developments in foreign exchange markets, EUR/USD will most likely break above 1.1714 and our year-end 2018 target of 1.20,” ANB AMRO adds.

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EUR: Balance Of Risks Into ECB; What’s The Trade? – BofAML

Bank of America Merrill Lynch Research expects the ECB this week to toughen their language marginally, by removing the easing bias on QE, while insisting on the need for prudence and a persistent monetary stimulus. 

“Summing up our ECB call: September pre-announcement of a decision on the future of QE in October; October announcement that QE will be scaled back from EUR60bn to EUR40bn for 6m starting in January 2018; regular tapering to follow in 2H18; end of QE in December 2018 accompanied by a technical deposit rate hike. The nature of the recent selloff and the shape of the Eonia curve suggest the market is pricing in the end of QE could be as early as June 2018,” BofAML adds. 

FX: Sidelined EUR/USD into ECB:

“We would not necessarily buy the Euro at these levels and ahead of the ECB meeting, but we admit the balance of risks is slightly positive. 

Based on past evidence, investors are reluctant to buy EURUSD when it is close to 1.15, as the ECB has often talked the currency down at this level

However, if the step-by-step approach of the ECB to prepare markets for QE tapering this fall pushes EURUSD higher, there may not be much that the ECB could do to stop it and its verbal interventions may have diminishing returns. 

Our proprietary flows show investors selling the USD rally in response to hawkish Fed comments, but buying the EUR, particularly our real money clients,” BofAML argues. 

EUR: The Times Are Changing For ECB; What’s Next For EUR/USD? – CIBC

CIBC FX Strategy Research notes that it’s been nearly five years since President Draghi’s famous ‘whatever it takes speech’, but finally, the times are a changing.

“Eurozone growth is looking more regionally broad-based and disinflationary pressures have abated. The door is beginning to open, ever so slowly, to a downshift in monetary stimulus.

As these events have unfolded, the euro has outperformed. The EUR is up more than 8% on the year, but given that it started from extremely undervalued levels on trade fundamentals, there’s likely more gains in store for the year ahead,” CIBC argues.

“The central bank could begin by announcing a moderation in bond-buying in the coming months. Draghi is set to make a major speech at, of all places, the Fed’s annual Jackson Hole event, the venue of his speech those five years ago,” CIBC adds.

EUR: Further gains ahead; set to breach 1.16.

“Look for the euro to continue appreciating versus the greenback over the rest of this year, breaching the 1.16 resistance level that has held since early 2015. Thereafter, the nascent convergence in policy between the ECB and Fed should see the euro continue to gain ground in 2018,” CIBC adds.

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