Euro_Tone_Changes_as_ECB_Flexes_Muscles_Once_Again_body_Picture_1.png, Euro Tone Changes as ECB Flexes Muscles Once Again

Euro Tone Changes as ECB Flexes Muscles Once Again

Fundamental Forecast for Euro: Neutral

The Euro finished the week strong, posting a massive gain of +4.70% against the Japanese Yen, while adding a less but still commendable +1.32% against the US Dollar. Curiously, despite there seemingly being another pivot in the European Central Bank’s tone, the Euro was still outpaced by the formerly liquid safe haven, the Swiss Franc, by -0.25%. Data over the past week was rather mixed, with German inflation data for March coming in higher then expected, while the Italian Deficit-to-GDP rate fell in the 4Q’12. Overall, however, the tone remains negative economically speaking, as the region faces the worst recession since the depths of the global financial crisis that began in 2007.

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Despite the bluster from Cyprus and now potentially Slovenia, and even discouting the Italian political mishmash that won’t be resolved for at least another several months, the Euro all of the sudden looks rather bullish, from both a fundamental and a technical perspective. In fact, I think that both points of analytical interpretation are valid reflections of the other. On the technical side, a Bullish Falling Wedge pattern had developed off of the February 1 high, signaling a relief reversal in trend to the upside. Fundamentally speaking, a strong positive catalyst would be required to initiate that technical reversal. ECB President Mario Draghi’s press conference proved to be that dynamic input needed.

There were two sides to President Draghi’s press conference. On one hand, the first half of the press conference largely concentrated on the bleak economic outlook for the region, which the ECB mind as well have downgraded officially because the tone was certainly more worried; but the second half of the press conference was dominated by the phrase that there is “no plan B” for the Euro. This second part took precedence over the first, and thus the Euro was propelled amid another statement of ultimatum – the first being President Draghi’s “whatever it takes” comment in July that led to the 2012 bottom at 1.2041.

The EURUSD has rallied approximately +200-pips between the start of the ECB’s press conference on Thursday to the market close on Friday, including seeing a boost earlier in the session after the horrible US labor market reading. Similarly, the EURJPY climbed as many as +800-pips this week from low to high, as the Bank of Japan initiated QE on a scale of $200B/month, easily trumping the Federal Reserve’s more timid $85B/month pace.

Now that the ECB is reaffirming its faith in the Euro, providing a near-term bullish accelerant, all while other major central banks are remaining in their dovish holding patterns, or yet, ramping up the pace of their easing programs, there’s certainly some scope to see the Euro extend its gains next week. But preventing the Euro’s outlook from being standalone bullish to a more tempered bias, is the fact that the region remains an absolute disaster economically speaking, and if no new monetary policies are going to be implemented, and fiscal policies will continue to shift to austerity, then the Euro-zone will continue to contract throughout 2013, regardless of what the ECB hopes to happen “later in the year.” Accordingly, we adopt a neutral tone, but with a clear tilt towards bullish for the coming five days. –CV