David Kohl, Chief Currency Strategist, Julius Baer
The flow of negative economic data surprises gives the Governing Council of the European Central Bank (ECB) plenty of reasons to stick to its cautious stance when it comes to scale back its unconventional monetary policy at today’s meeting. The growth euphoria of the first months of the year is over, which takes away considerable pressure from the ECB to explain its high dose of patience when it comes to ending its asset purchasing programme. Limited supply of risk-free government papers in the Euro zone is an additional factor which allows the ECB to employ little rhetoric regarding the future of asset purchases.
A strong guidance is currently not necessary despite the fact that rising US Treasury yields produce some feeble upwards pressure on European yields.
Consequently, today’s ECB meeting should have limited impact on prices of risky assets and produce little to stop the euro from correcting further as the widened interest-rate differential relative to the US dollar is having increasing power over the direction of the exchange rate. We continue to forecast more downside for EUR/USD with the unwinding of extreme speculative long positions having the potential to produce a significant undershooting below our 3-months forecast of 1.20 EUR/USD.
Weaker Euro zone data and shortage of risk-free Euro zone bonds are balanced by rising US bond yields, allowing the European Central Bank to stay on the sidelines at today’s council meeting. Downside pressure on EUR/USD could intensify.