EUR/USD Firm Ahead of ECB As Investors Chase Yield

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Market Drivers for January 9, 2014
EUR/USD steady despite rumors of rate cut by ECB
UK Trade improves
Nikkei -1.50% Europe .46%
Oil $92/bbl
Gold $1226/oz.

Europe and Asia:
AUD Retail Sales 0.7% vs. 0.5%
CNY PPI -1.4% vs. -1.2%
UK Trade -9.4B vs. -9.4B

North America:
GBP MPC Rate Decision 7:00
EUR ECB Rate Decision 7:30
USD Unemployment claims 8:30

It’s been a quiet night of trade in the currency market ahead as traders awaited interest rate decisions from both the ECB and the BoE later in the day. The consensus view is that neither central bank will make any policy changes at today’s meetings, but there are some analysts that believe that the ECB may further lower its benchmark rate to 10bp from the current 25bp level.

The EZ area has been a laggard in growth amongst the G-3 members and has been plagued by deflationary pressures as demand in the region remains weak. Part of the problem is the massive imbalance between Germany – the union’s largest and most important economic member which has been doing well – and the rest of the union which for the most part remains mired in a recession.

The Germans are notorious inflation hawks and have been adamant in opposing further monetary easing despite CPI numbers that have been running below 1% – well under the 2% ECB target. Mr. Draghi on the other hand is a much more dovish policy maker and it will be interesting to see if he is able to buck the German opposition to and add further monetary stimulus into the system.

Despite the relatively weak growth and expectations of an accommodative monetary policy for the foreseeable future, the EUR/USD has been remarkably resilient and has remained well bid near the 1.3600 level. One reason for its strength has been investment flows as the pair has benefited from inflows into the equity markets at the end of last and further flows into the periphery bonds at the start of this one.

Today, Spain’s 5 year bond hit a record low in the first auction of 2014 as yield starved investors continue to pour into periphery sovereign credit on the assumption that economic conditions in the region will improve this year and that the ECB may provide further support in a form of its own QE program.

Today’s ECB presser therefore may be potential market mover if Mr. Draghi pushes for a more dovish stance to the policy and although few market players expect any changes in rates, if Mr. Draghi hints that the central bank is open to further reduction in the benchmark rate to 10bp, the pair could come under renewed selling pressure and the test the 1.3550 lows from yesterday. If however, Mr. Draghi offers no new guidance the pair could continue to rebound towards the 1.3700 barrier as the day progresses.

Boris Schlossberg
Managing Director

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