FX – Muted Monday As ECB Hesitates to Act

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Market Drivers for April 7 2014

Nowotny – rate cut a possibility but not yet

Nikkei drop creates test of 103.00 in USD/JPY

Nikkei -1.69% Europe -.80%

Oil $100/bbl

Gold $1299/oz.

Europe and Asia:

AIG Construction Index 46.2 vs. 44.2

EUR GE IP 0.4% vs. 0.4%

EUR Sentix 14.1 vs. 14.1
North America:

No major data

It been a very muted Monday open in the currency market today with little new economic data on the calendar as major pairs traced out narrow ranges in lackluster Asian and European dealing today. The EUR/USD recaptured the 1.3700 figure as some short covering kicked in in morning European trade aided by strong German Industrial production numbers.

On Friday, the pair weakened somewhat in the wake just slightly below consensus NFPs, but was really driven lower by a report in the German newspaper that ECB has already modelled the prospect of 1 Trillion of QE. Any such action from European monetary authorities would no doubt put downward pressure on the unit, but while the rhetoric from ECN remains dovish, the action does not.

Today’s comments from ECB council member Nowotny are a perfect example of this bi-polar approach. While Mr. Nowotny noted that ECB rate cut has not been ruled out, he gave no indication that such move was imminent and while he also appeared open to the prospect of unconventional measures such as QE, he again did not state that the ECB was going to enact such a plan in the foreseeable future.

Indeed, European policymakers appear to be stuck in a wait and see mode as they hope that economic data begins to improve alleviating the need for an aggressive monetary policy. April therefore could become the make or break month as key measures of inflation and growth could determine policy choices for the foreseeable future. If price levels remain depressed and worse if the flash PMI data shows no pickup in activity then the pressure on ECB to act is likely to escalate significantly and EUR/USD could see 1.3500 or lower as the month proceeds.

On the other hand if EZ data shows some signs of pick up, the EUR/USD could stage a surprising short covering rally that could once again test the 1.3900-1.4000 resistance. The pair remains remarkably resilient as the EZ superior current account position continues to boost the euro against the dollar.

Boris Schlossberg
Managing Director

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