Why EUR didn't fall on the ECB?
By Mark Jensen
The European Central Bank has made an unprecedented effort to weaken the single currency on Thursday. Yet EUR/USD strengthened and made the biggest daily advance in 3 months.
The measures announced by the ECB included cut in key interest rate to the record low of 0.15% and the deposit rate – to -0.1%, 2 rounds of targeted LTROs and suspension of SMP sterilization. All this was what the market has expected. We have been talking about this for weeks, so there’s actually nothing new and not so many reasons for euro to weaken.
In addition, the ECB said that it will work on the plans to buy asset-backed securities based on bank loans. This should be the strongest measure in the central bank’s bazooka. However, we don’t when this QE will take place – this year or later? This is one of the main reasons why euro is so resilient.
I don’t think that the ECB wants euro above $1.38. After the May meeting Mario Draghi mentioned that high euro was hurting the central bank’s effort to increase inflation. This means that the regulator will probably need to come up with further easing. At the same time, it’s worth noting that the ECB reduced inflation forecasts (to 0.7% this year, 1.1% in 2015 and 1.4% in 2016). These projections do not incorporate measures announced yesterday and easing might help to increase consumer prices.
At this point, when I look to EUR/USD chart in the long-term I expect the pair to stay above 200-week MA at $1.3400. On the upside, $1.40 is the limit as Draghi may give details about QE at the next meeting to prevent such a high exchange rate.
Now that we are more or less done with the ECB, we should focus on the Fed and its June 17-18 meeting. US central bank continues tapering QE. Now it’s buying $45 billion in bonds a month.