Talking Points:
- EURUSD short covering possible if ECB strikes optimistic tone.
- EURGBP, EURJPY offer most immediate bearish setups.
- See the April forex seasonality report.
As long as yields in the Euro-Zone continue to fall, and equity markets around the world rally, one would expect the Euro to continue to weaken. We may see a slight blip in that trend today thanks to the the ECB meeting, insofar as policymakers may view the stronger economic momentum in the short-term (the Citi Economic Surprise Index for the Euro-Zone currently resides at +55.7) and improving lending conditions (loans to non-financial corporations in the Euro-Zone only fell by -0.7% y/y per the most recent data in February, up from the -1.7% y/y three-months earlier and -3.8% y/y at the trough in July 2013) as reasons to be more optimistic about prospects for 2015.
The fact of the matter is that the continued presence of low nominal sovereign yields is the crux of the recovery, and any optimism the ECB brings forward will come with the ever-important commitment to seeing the €60 billion/month QE program to its conclusion in September 2016. Any commentary that suggests the QE program could be tapered – be it borne out of supply concerns or growth optimism – could cause a sharp Euro rally (shorts remain prevalent at 215.3K net-short contracts among speculators), a drop in equity markets, and yields to rise, especially in the periphery, which would surely send inflation expectations plummeting, thereyby undermining any progress seen to date.
It's in the ECB's best interests to downplay the scope of the recovery, and therefore, any rally see around the ECB meeting should prove short-lived.
See the above video for technical considerations in EURUSD, EURJPY, EURGBP, and EURAUD.
Read more: USD Breakout Contingent on Retail Sales, Tone at ECB Meeting
--- Written by Christopher Vecchio, Currency Strategist
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