Market News & Insights
12 January 2018

Euro Surges as ECB Ponders Guidance Change

A perfect storm brewing in EURUSD has helped EURUSD above resistance at 1.2091 and this morning we have pushed through the 1.2100 level and to fresh three year highs. EURUSD is now up over 1.5% in less than two days thanks to ECB minutes which were perceived as hawkish, helping EUR to rally over 1% in the aftermath, while the USD has been facing broad selling following weaker PPI and jobless claims data. It was another day or record highs in US equity markets, the S&P is up over 50% from last January lows, and up over 5% already this year. Commodity prices have also been on the rise with oil prices up over 10% in the last month alone, and even gold is up almost 7%. It’s hard to fathom how positive markets are when it feels like there are so many underlying risks but we cannot argue with direction, in currencies or anything else, our goal in to manage the risk around change in the status quo.

Overall the ECB was as expected however there were a couple of notable points that supported the markets hawkish take and the resulting demand for euro. The ECB did remain cautious on inflation and most were in agreement in ECB current policy, however they will likely look at a gradual shift in guidance (from early 2018) and they were also in agreement that communication must change should reflation continue. They were broadly comfortable in wage dynamics and showing “increased confidence that inflation pressures would take hold”, while further easing of financial conditions is not warranted. The last two points there are likely the most hawkish and for now EUR is soaring higher.

Again our goal is to manage the risks around the euro, and while markets have taken the “gradual shift” in guidance as a possibility for tapering to begin before the current program is to run out in September, it is important not to put words in the ECB’s mouth. Again we must point out that as the euro is trading up over 15% in the last year (weighted), it will create downward pressure on inflation – the ECB’s key concern. A “gradual shift” in guidance may not mean tapering or pending tightening, more a change in the key area’s the ECB look to address. As it stands however EURUSD is at fresh three year highs, with next support towards 1.2147 area, while 1.2085/91 should offer some support on moves lower. EURGBP is tested .8925 area already this morning, that has been a key area previously and we saw quick drop back towards .8900. That’s the narrow range for now.

The USD has been struggling, even suggestion from Dudley last night saying that three rate hikes in 2018 is a “good starting point” to aim for. There’s not much data to get us excited this morning so focus on the calendar will be on hold until this afternoons US releases. US data has been notably deteriorating vs consensus in recent weeks and hence we’ve seen some pressure on the US despite hawkish sounding comments from Fed officials. CPI inflation and Advanced retail sales headlines today’s US calendar and should they prove weaker than expected then there is considerable downside risk to the greenback, especially as we see the USD index sitting on 3 years lows and major support, with a vacuum for the dollar to fall into below.