From the FXWW Chatroom: With the BoJ showing increasing signs of nervousness, investors are looking for an alternative asset currency. Bullish EURUSD positions should perform well should risk appetite remain offered, in our view. We are concerned that the next leg lower in equity markets could be driven by US data weakness. Friday’s comments by Fed’s Dudley, which were less dovish than hoped, have made clear that the Fed is not willing to change its reaction function in light of weak data and market revolt, yet. After hiking rates in December, the Fed may have entered a position of high vulnerability. Markets have only priced in one additional hike for this year, but in order to ‘get back ahead of the curve’, the Fed would have to signal that it may hike rates all this year. Dudley’s comments suggest that the Fed is not yet ready going into this direction. With the Fed on the sideline and strong earnings releases beating expectations unable to stabilise the equity market, all eyes will be on global data releases, which we expect to stay weak. The EUR benefits from safe-haven flows unless the ECB does reduce its deposit rate further. However, the outcome of the December meeting and recent ECB communication suggest that a further deposit cut is a less preferred policy tool compared to QE. The problem is that additional QE may not impact the yield curve sufficiently to weaken the EUR.
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