EUR: Unconvinced by Draghi? - Rabobank

According to Jane Foley, Senior FX Strategist at Rabobank, the market was expecting ECB President Draghi to push back against EUR strength yesterday but, his rather limited protests about the strength of the EUR failed to find a purchase. 

Key Quotes

“Broadly speaking, when intervention of any kind can be judged to have any lasting success in the FX market it is when fundamental factors are providing support in the same direction.  Although hindsight will eventually provide a better perspective of whether the market’s current enthusiasm for EUR can be justified, there is no doubting the popularity of the long EUR/USD trade at present.  This meant that any attempt by Draghi to try and temper the upside for EUR/USD yesterday was always going to be tough.”

“Earlier in the month the EUR had been propelled higher by a headline suggesting that the minutes of the December ECB meeting were more hawkish than expected.  Specifically this headline hinted that the ECB was considering changes its forward guidance.  At the time this news served only to accentuate the current trend in the market.  Draghi’s attempts to discredit this news yesterday and indeed this morning’s report from ‘ECB sources’ that the Governing Council will wait until June to alter its guidance has had nothing like the same impact on the EUR as the original news.  In other words, despite Draghi’s protests the market is still judging fundamentals as being supportive of EUR/USD.”

“In our view the change in sentiment with respect to the EUR started to become apparent at the very start of 2017.  At this time German economic data began to surprise on the upside.  In the ensuing months it became clear that the Eurozone economic recovery was not just limited to Germany but was impacting the whole region.  Simultaneously political risks in the Eurozone failed to manifest.  On the assumption that many accounts had built long EUR position in 2017, we were of the view that the pace of the uptrend in EUR/USD would slow this year leaving the currency pair in the 1.24 region by the end of the year.  Clearly we now have to re-evaluate this forecast.”

“Aside from the independent and marked weakness of the USD, a significant factor behind the acceleration of the EUR’s gains vs. the USD this year has been speculating regarding the policy stance of the ECB.  Although Draghi failed to have much impact in dampening the uptrend in the EUR yesterday, he did attempt to sell the message that the risk to the Eurozone economy were broadly balanced and that there were downside risks related to global factors.  He even explicitly stated that “based on today’s data and todays projection, I see very few chances at all that rates could be raised this year.”  On this point we concur. The reaction in the Eonia curve, however, was half-hearted.”

“We would argue that in the weeks ahead there is risk that the Eonia forward curve will adjust lower and this should sap some if the gusto out of the EUR.   This suggest that EUR/USD is at risk of entering into a consolidation phase of adjusting moderately lower.  Other factors which support this view can be taken from technical analysis.  Momentum indicators suggest that the uptrend in EUR/USD is currently looking stretched while trendline resistance close to current levels suggests that a significant jump above current levels could be difficult to achieve in the near-term.” 

“For this reason we are forecasting that it could take some weeks to convincingly break above the EUR/USD1.25 area and this could be preceded by some pullbacks.  We are looking at EUR/USD1.25 as a 3 mth target and we have pushed up our 12 mth call to EUR/USD1.28.”