Sell the Euro Ahead of Thursday's ECB Meeting say Societe Generale, BMO Capital Markets

Modified: Monday, 21 January 2019 16:38 GMT
Written by: James Skinner

- EURUSD weakens at start of new week, eyes key support level.

- Soc Gen, BMO both say sell ahead of Thursday's ECB meeting.

- ECB will have to acknowledge risks to the economy are piling up.

The Euro will struggle this week as markets shun the currency ahead of Thursday's European Central Bank (ECB) meeting, which will see policymakers respond to a recent spate of dire economic figures, according to analysts at Societe Generale and BMO Capital Markets.

Selling the Euro is the best strategy for traders ahead of Thursday's meeting, the banks say, because the ECB is unlikely to offer any support to the currency. And the single currency is close to the top of a multi-week range, but lacks the positive news-flow and momentum required for a breakout to the upside.

"The ECB meets Thursday and will have to acknowledge that the economy isn't doing well. Hard, then, to see where we get any positive euro news as expectations of a policy reaction (another TLTRO) grow. We think it's too soon for that but while we may struggle with EUR/GBP shorts this week, EUR/JPY and EUR/AUD shorts still appeal and more importantly, a test of the lower end of the recent EUR/USD 1.13-1.15 range is possible," says Kit Juckes, chief FX strategist at Societe Generale.

Juckes and the Soc Gen team advocate selling the Euro relative to the Japanese Yen and Australian Dollar, rather than betting against the Dollar. However, they as and others are mindful the latter could be pushed lower in coming days by concerns over a weakening economy and the implication it could have have for ECB policy.

Eurozone growth halved from 0.4% to 0.2% during the third-quarter of 2018 and all of the data emerging emerging from the bloc's largest economies of late has suggested an equally disappointing performance is likely for the fourth quarter, although that number will not be released until next week.

"We think the EUR is cornered on the downside, and although we do not envisage a major breakout in EURUSD as soon as this week, our overwhelming bias is to use levels north of 1.1400 as selling opportunities to aim for a test below the 1.1300 mark over the coming days," says Stephen Gallo, head of FX strategy at BMO Capital Markets. "We’ll play it by ear."

Above: EUR/USD rate shown at hourly intervals.

The EUR/USD rate was quoted -0.05% lower at 1.1360 during the noon session Monday and is now down by -0.9% for 2019.

"EUR/USD last week sold off towards the 1.1330 up trend and is seeing some stabilisation ahead of here. The market is currently pretty neutral, but we look for some signs of recovery this week," says Karen Jones, head of technical analysis at Commerzbank. "Dips lower should be contained by the 200 week ma at 1.1326 and the 2016-2019 uptrend at 1.1306."

Above: EUR/USD rate shown at daily intervals.

Growth matters for the Euro because rising and falling demand have an impact on the rate of inflation and the ECB has for years been attempting to coax the consumer price index back to its target of "close to but below 2%".

The Eurozone economy saw its best year since 2011 during 2017 and most analysts say it probably still grew by a decent 2% pace in 2018, but despite that inflation has remained a long way below the target.

With volatile energy and food items excluded from the goods basket, core inflation remains at 1% and has gone nowhere since early 2015 when the ECB first cut its deposit rate into negative territory and began quantitative easing.

The ECB needs inflation to be heading back toward the target level if it is to justify raising its interest rate at any time soon, but a persistent drip of poor economic news means the odds of this happening have been getting longer and longer in recent months.

"It’s looking increasingly like any sort of late-2019 rate hike will be miniscule in magnitude, and be delivered in a manner that has a correspondingly miniscule impact on the EUR," says BMO's Gallo.

Markets currently have only minimal hope of an ECB interest rate rise in 2019, given the market-implied ECB deposit rate for December 2019 was just -0.31% Monday. The actual rate is -0.4%, so the market clearly sees only a very small chance of a very small change happening in the near future.

However, that alone won't be enough to spare the Euro from further losses over the coming weeks if the ECB signals Thursday that rather than raising rates, it could soon have to support the bloc's economy with fresh stimulus.

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