Ned Rumpeltin, European Head of FX Strategy at TDS, suggests that against the backdrop of a very uncertain outcome at this week’s ECB meeting, we do not think pre-positioning in EURUSD ahead of the event offers an attractive risk/ reward trade-off.
Key Quotes
“Many of the decision points will result in binary outcomes that could produce large price gaps with little opportunity for entry or exit in between.
At the same time, the influence the ECB has over FX markets may have diminished somewhat as central banks globally approach their policy limits. The ECB has had some success in capping EUR strength but its ability to engineer currency weakness has underwhelmed.
This leaves us less confident that a major dose of monetary stimulus this week will result in a sustained EUR decline, particularly against the USD. With the “weak euro’” trade unable to get much traction in recent months, we don’t think the market is quite ready to embrace the “strong dollar” notion yet either.
More reliable, however, may be to position for the impact this week’s ECB meeting may have on broader risk appetite. Ultimately, the FX market moves that result from investor sentiment may be larger and more sustained in the wake of the decision.
EURAUD remains our preferred proxy for risk appetite as the correlation between this cross and global equity market benchmarks remains high and stable.
We are biased to go into the ECB meeting with a (small) short EURAUD position on the expectation that Draghi will be reluctant to repeat December’s harsh disappointment. We have an initial target of 1.4358 with a possible extension down to 1.4132.
There are no guarantees of this, however, and a less positive outcome is likely to resonate across risky assets. Any hint of a disappointment from Draghi would have us quickly cover shorts. On the topside, we are monitoring resistance levels at 1.4700, 1.4735, and 1.4790.”
(Market News Provided by FXstreet)
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