Little relief for the euro
Today’s ECB decision and Draghi’s press conference do not alter our view that EURUSD
upside will be limited. Yes, the generally upbeat staff projections – pegging an inflation
pick-up from 0% in 2015 to 1.5% in 2016 and 1.8% in 2017 against the backdrop of
improving cyclical growth momentum – defied the euro bears. However, the initial
squeeze higher in EURUSD simply teed up better levels to sell. Indeed, the bottom line
is that (1) the degree of uncertainty surrounding the outlook is obviously high; (2) the
ECB confirmed that it plans to buy negative-yield debt down to its deposit rate; and (3)
QE remains an open-ended policy. This underlines the prospect of ongoing policy
divergence with the Fed. Certainly, the ECB should be comfortable with recent EURUSD
weakness, with risks to our 1.10 target clearly skewed to the downside heading into
tomorrow’s key US employment report.
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