EURUSD: An Unusually Hawkish Yellen, Divergent Monetary Policy Between Fed & ECB And Ongoing EU Political Risks Has Made Draghi’s Task Easier To Keep EURUSD Below 1.10 Without Any Incremental QQE

EURUSD Outlook: 10/03/2017 (06:00 GMT)

LTP: 1.0595

Yesterday, ECB made no change in its policy rate as highly expected and kept deposit rate unchanged at -0.40% and interest rate at 0.00%. Although, initial statement of ECB sounded somewhat dovish, when it said that “ECB stand ready to increase its size and/or duration of QE” as par evolving situation in EU (i.e. financial conditions, inflation trajectory and geo-political headwinds), some of Draghi’s comments at the Q&A presser were more on the hawkish side and EURUSD bounced off the day’s low.

Overall, ECB has acknowledged notable improvement in its growth & inflation and also slightly raised the GDP & inflation projection of EU for 2017-18 and expressed less concern about spiraling effect of various political risks in Euro area (Brexit, election in France/Frexit, election in Denmark/Germany and rise of anti  Euro nationalistic ultra right politics). Previously, market may be expecting some dovish script from Draghi in the back drop of ongoing geo-political tensions in EU.

Although, headline CPI may be around 1.9% now, the core CPI (ex fuel & food) still remains around 0.90% in EU. ECB follows the core inflation more rather than headline inflation and thus, ECB is in no hurry to express any intention for any tapering in 2017 as its still premature. As par its schedule, ECB will buy EUR 80 bln bonds until this March’17 and thereafter will continue to buy EUR 60 bln at a monthly rate till Dec’17, totaling EUR 540 bln.

In any way, at the end of the day, trajectory of EURUSD may be decided more by Fed or more specifically by rhetoric of “Trumpism” & EU political risks, rather than ECB/Draghi. Fed is the only major central banker in the G-10 universe, which is talking about multiple rate hikes in 2017-18 and on the other side, all the others are either neutral or dovish in their approaches. Thus, an unusual hawkish Fed and other dovish/neutral central bankers are causing divergent monetary policy between Fed & other G-10 central bankers, including ECB & BOJ. The risk to this assessment is Trump’s present effort to talk down the USD contrary to earlier rhetoric.

For ECB, the present EURUSD range of 1.10-1.103 or even 1.00 (parity) & the bond & interest rate differential may be an ideal scenario considering the export & import obligations of EU zone and its goal of 2% core CPI. The recent spate of upbeat economic data from EU may be also a by-product of a devalued currency (EURUSD), accelerated after “Trumpism”.

Technically, EURUSD (LTP: 1.0595) need to sustain above 1.07-1.08 area for further rally towards 1.10-1.15 in the near term (under bullish case scenario).

On the other side, sustaining below 1.03 area, EURUSD may further fall towards 1.00-0.97 & even to 0.90 in the near term (under bear case scenario).

Analytical Charts: EURUSD