Despite EURUSD coming off its Thursday 1.1495 high, we remain USD bearish. The ECB meets on Thursday. In this respect, there have been two significant speeches recently. First, Austria’s Nowotny suggested that it would be too early to discuss QE extension. Second, the ECB’s Executive Board member Coeure cited the very high expectations from ECB policy, suggesting one should not expect from the ECB to solve problems outside its mandate (i.e., related to fiscal reform). Draghi may use the press statement to keep the door open for further ECB action, but he might have to bring deposit rate cuts back into play to weaken the EUR significantly. The ECB extending its QE operation or increasing the amount of its monthly purchases or changing the composition of its security purchases has been mostly priced in by markets. We highlighted the difference between the current EURUSD and the level suggested it should trade, concluding that EURUSD trades at a ‘Draghi discount’ as high as 10 big figures. Any sign the ECB may not engage in additional measures is likely to reduce the ‘Draghi discount’ significantly. Note that over the next few months, energy-related base effects will dissipate from price statistics, suggesting higher YoY inflation rates. The ECB treading water this Thursday will reduce the chances of the bank swinging into additional action at all, suggesting a higher EUR by the end of this week.
Trade of the week: Long EURUSD at market, target 1.2000, stop 1.1250.
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