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ECB Meeting: Risk of EUR short squeeze lower than in December - MUFG

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 10, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    Lee Hardman, Currency Analyst at MUFG, notes that the euro has weakened modestly in the Asian trading session ahead of today’s ECB policy meeting at which further monetary easing is expected to be announced.

    Key Quotes

    “The lack of euro weakness in anticipation of today’s policy meeting in part reflects caution amongst investors that the ECB could disappoint expectations again with the memory from the December meeting still fresh in minds. The ECB’s disappointing policy response in December prompted a significant short squeeze higher for the euro partially reversing weakness in anticipation of the meeting. It prompted the ECB to signal that investors had got carried away in expecting even more aggressive easing than was ultimately delivered. As a result, the market has remained more cautious about building up easing expectations ahead of today’s policy meeting although more aggressive easing is still expected providing a high hurdle for the ECB to deliver a dovish surprise.

    We are expecting similar to consensus expectations for the ECB to deliver a further 0.10 percentage point reduction in the deposit rate, a further six month extension of the duration of the QE programme to the end of September of next year, and unlike in December to increase the amount of monthly QE purchases by EUR10 billion. If delivered the steps should contribute to a modest weakening of the euro. We doubt that the ECB will be able to weaken the euro more significantly. With financial market conditions improving recently, they are more conducive for euro weakness as further ECB easing further boosts the relative appeal of overseas assets for euro-zone residents.

    The scope for another euro short squeeze is more limited now with speculative market positioning more neutral heading into today’s meeting. The fundamental case for more aggressive ECB easing is also stronger reducing the likelihood of policy disappointment.

    Downside risks have increased recently to both inflation and economic growth have disappointed. A more aggressive policy response is required from the ECB to maintain the credibility of their inflation target mandate.

    Overall, we continue to expect EUR/USD to grind lower in the year ahead. An intensification of Brexit risks will likely begin to weigh more on the euro in the coming quarter while the US dollar should derive support from building expectations for further Fed tightening.”
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