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Euro Tracks Lower Ahead of ECB - Looking for More than a Rate Cut

Euro Tracks Lower Ahead of ECB - Looking for More than a Rate Cut

Christopher Vecchio, CFA, Senior Strategist


The Euro is slightly lower across the board (but for against the Australian and New Zealand Dollars) ahead of the vaunted European Central Bank Rate Decision today, but it’s unlikely that the Euro remains relatively unchanged on the day for too long. At this point in time, a 25-bps rate cut has essentially been priced into both credit and FX markets; accordingly, we’re looking for a greater response from the ECB in order to determine which way the Euro should trade.

There are two sides of the equation to consider with respect to today’s ECB policy meeting. On one hand, calls for a rate cut of been growing in volume, and we’ve seen Italian and Spanish bond yields move towards all-time lows on the shorter-end of the curve. Recent data would suggest that a rate cut is necessary, with the core countries today showing that deflation is becoming prevalent, at least at the factory gate. The other side of the coin is more complicated: what if the ECB’s rate cut is the only policy move that is made? At this point in time, because of the broken transmission mechanism that has prevented the flow of credit into the periphery at the same level of ease and security as it does into, say, Germany, there are very few that believe a rate cut of any magnitude will help. Attention is thus draw to non-standard measures, which is where the real juice in the ECB policy meeting is today.

Ultimately, because the rate cut is essentially priced in, for the Euro to see any significant swell of strength, the ECB will need to address how policy is being transmitted through the Euro-zone, and ways to increase credit flow to the periphery. Collective thought suggests that efforts to improve SME lending (small and medium enterprises) would be the best outcome for the Euro; without it, disappointment should be afoot. It is my belief that we’ll see a rate cut and a dovish tilt from ECB President Mario Draghi, but any measures that would utilize the ECB’s balance sheet as a policy tool are likely sidelined for the time being.

Taking a look at European credit, mixed readings across the board (with some of the core regions seeing higher yields) has the Euro lower ahead of the ECB Rate Decision today. The Italian 2-year note yield has increased to 1.058% (+2.9-bps) while the Spanish 2-year note yield has decreased to 1.537% (-11.0-bps). Likewise, the Italian 10-year note yield has decreased to 3.857% (-2.4-bps) while the Spanish 10-year note yield has decreased to 4.076% (-3.4-bps); lower yields imply higher prices.


GBP: +0.17%

CAD: +0.13%

JPY: +0.12%





Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.08% (-0.80% past 5-days)


Euro_Tracks_Lower_Ahead_of_ECB_-_Looking_for_More_than_a_Rate_Cut_body_Picture_7.png, Euro Tracks Lower Ahead of ECB - Looking for More than a Rate Cut

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Euro_Tracks_Lower_Ahead_of_ECB_-_Looking_for_More_than_a_Rate_Cut_body_Picture_6.png, Euro Tracks Lower Ahead of ECB - Looking for More than a Rate Cut

EURUSD: The EURUSD put in an Inverted Hammer yesterday as the breach of the mid-April swing highs near 1.3200 proved to be fruitless. The rejection in price also coincided with the rejection in the former highs seen in daily RSI, meaning that there needs to be a strong fundamental catalyst to underpin a breakout or breakdown (thankfully, the ECB is today). Without additional policy measures outside of a rate cut, the Euro could be weighed by disappointment, with a sell-off pushing the pair back towards 1.3075, the 38.2% Fibonacci retracement on the July 2012 low to the February 2013 high. Shorts should be contained to 1.3245/50, just above the monthly high.

Euro_Tracks_Lower_Ahead_of_ECB_-_Looking_for_More_than_a_Rate_Cut_body_Picture_5.png, Euro Tracks Lower Ahead of ECB - Looking for More than a Rate Cut

USDJPY: No change as price holds below the 21-EMA: “The Bullish Ascending Triangle pattern was negated late last week and now price has traded below both the 8- and the 21-EMAs, amid a break in the daily RSI uptrend. On Friday I noted “the USDJPY appears ripe for a pullback, which could be provoked by a weaker than expected US 1Q’13 GDP reading.” With this transpiring, a break of the 21-EMA at 97.80/85 could see price extend its losses to former resistance now support at 96.60.”

Euro_Tracks_Lower_Ahead_of_ECB_-_Looking_for_More_than_a_Rate_Cut_body_Picture_4.png, Euro Tracks Lower Ahead of ECB - Looking for More than a Rate Cut

GBPUSD: The GBPUSD continues to ride the wave of optimism since last Thursday’s beat on the UK 1Q’13 GDP report, pushing up against channel resistance that’s been intact off of the March 12 and April 4 lows, at 1.5580/600. With the ECB meeting today, further gains by the Sterling are possible: on a disappointment, the GBP could see flows as an alternative regional safe haven; or on a positive ECB meeting, it could be viewed as a candidate to benefit from the residual impact of new growth measures. The EURGBP will be the key driver for the GBPUSD today.

Euro_Tracks_Lower_Ahead_of_ECB_-_Looking_for_More_than_a_Rate_Cut_body_Picture_3.png, Euro Tracks Lower Ahead of ECB - Looking for More than a Rate Cut

AUDUSD: An Evening Star candlestick cluster (bearish reversal) has materialized on the daily charts, with price below the 8- and 21-EMAs, as well as the 200-DMA. The daily RSI has fallen back towards 36, where RSI has held above all year. A break here exposes a run back towards the early-March lows just ahead of 1.0100.

Euro_Tracks_Lower_Ahead_of_ECB_-_Looking_for_More_than_a_Rate_Cut_body_Picture_2.png, Euro Tracks Lower Ahead of ECB - Looking for More than a Rate Cut

S&P 500: No change: “Is the top in? A dramatic sell-off yesterday dropped the S&P 500 below the crucial 1570/75 area, former swing highs as well as the ascending trendline support off of the late-December and late-February swings lows – coincidentally the pre-fiscal cliff deal low and the post-Italian election low. We’re in a bit of “no man’s land” here, with either a close back above 1570/75 necessary for a retest of the highs, or a close below 1530/35 to signal weakness towards and below 1500.”

Euro_Tracks_Lower_Ahead_of_ECB_-_Looking_for_More_than_a_Rate_Cut_body_Picture_1.png, Euro Tracks Lower Ahead of ECB - Looking for More than a Rate Cut

GOLD: No change: “The major support zone from the past 18-months from 1520 to 1575 gave way with fervor last week, as the combination of weak fundamentals (financial institutions scrambling for cash in Europe after Cyprus) and broken technicals produced the ideal selling climate. Precious metals in general have gotten hammered, and Gold has fallen back to the mid-March swing lows near 1380/85. A weekly close below 1430 this week leaves the possibility of a bigger dip towards 1305.”

--- Written by Christopher Vecchio, Currency Analyst

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