Talking Points:
- On a less dovish ECB, EUR/USD could squeeze to $1.1500.
- Hints at new easing would weigh on EUR/CAD, EUR/GBP easily.
- Crowd's disdain for EUR/USD rally shows in positioning changes.
Markets are fairly calm this morning, digesting the past two days of rather surprising (if not exciting) price action across various asset classes - FX, commodities, and equities alike. Yet today, when you look in the FX space, movement in the EUR-crosses has been isolated; EUR/USD is trading an inside day thus far. A quick glance of the calendar reveals why: the European Central Bank meets tomorrow; and traders are unlikely to lever up too greatly in any instruments that could be impacted directly.
For traders looking for a surprise, they will be bound to be disappointed. Just like in January, we’re still too close in proximity to the most recent changes to the ECB's easing policies before the central bank is ready to declare the measures ineffective yet. Likewise, with comments today from Germany's Economic Minister Sigmar Gabriel saying that ECB policy is no longer 'working' for Germany, it seems that the Governing Council's convening will not be one without friction.
If anything, this means that ECB President Mario Draghi's press conference - in particular, the Q&A session when he gets to go 'off book' - will be where the volatility in the EUR-crosses could arise tomorrow. Draghi & co. have previously said that their policies are not targeting the FX channel, which gave the Euro breathing room to rally (and it has). Without explicit complaints about the exchange rate - and likewise, energy prices - in regards to the inflation outlook, the ECB could be priming the Euro for another squeeze higher.
Depending upon the tone and tenor of the ECB press conference, various EUR-crosses are better situated than others. Given the US Dollar's weak footing right now, a less dovish than expected tone should help cater to EUR/USD squeezing higher towards $1.1460/1.1500.
On the other hand, given the ongoing resiliency of energy prices and the Canadian Dollar, EUR/CAD could prove to be the best opportunity should the press conference reveal the ECB's intention to ease policy further, sooner than what markets are currently pricing - Q4'16. Over the next few months, EUR/GBP (and likewise GBP/CHF) should be closely watched as proxies for the upcoming 'Brexit' trade.
See the above video for technical considerations in EUR/USD, EUR/CAD, EUR/GBP, GBP/CHF, AUD/USD, USD/CAD, and the USDOLLAR Index.
Read more: Silver-Gold Relationship Evolving in a Bad Way for US Dollar
If you haven't yet, read the Q2'16 Euro Forecast, "EUR/USD Stuck in No-Man’s Land Headed into Q2’16; Don’t Discount ’Brexit’," as well as the rest of all of DailyFX's Q2'16 quarterly forecasts.
--- Written by Christopher Vecchio, Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
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