EUR/USD Lows @ 1.0458 to Remain in View

"Draghi’s track-record over the last two years has been excellent and EUR/USD rallies should be sold for a move under 1.05" - ING.

News that the ECB might be considering two-tiered bank charges on excess deposits (together with a step-up in QE) had a sizable impact on the foreign exchange market over the past 24 hours inviting the EUR-USD to below 1.06.

This 'two-tier' framework could allow the ECB to deliver a larger-than-expected cut in the deposit rate, while trying to mitigate the cost for the banking sector.

The news undid all the good work on propping up the euro exchange rate done by Germany’s IFO index reading which came in ahead of expectations a day earlier. It was confirmed confidence amongst German businesses is incredibly bullish.

Ahead of the ECB news the USD was on the backfoot owing to a reported decline in consumer confidence for November; but any further declines in the US dollar should be contained as we approach the much-anticipated US rate hike in December.

The market’s focus is, once again, on the European Central Bank (ECB) meeting next week, December 3.

Policy possibilities are now coming to the forefront as the ECB looks to a range of stimulus options – coinciding with President Draghi’s position to use “all instruments available”. 

"The Eurozone rate market also reacted sharply, begging the question whether President Draghi can still over-deliver next Thursday," says a note from ING confirming fears that the exchange rate and interest rate markets may be getting ahead of themselves.

However - ING say such fears, while valid - should be ignored.

"While there may be push-back from a few of the ECB dissenters over coming days, creating the risk of a EUR short squeeze, Draghi’s track-record over the last two years has been excellent and EUR/USD rallies should be sold for a move under 1.05," say ING.

Jeremy Stretch of CIBC World Markets Inc is also targetting a lower euro yet:

“Since the October ECB statement the market has been increasingly fixated by presumptions of a deposit rate cut of at least 10bp, this being set against an extension in ECB balance sheet, beyond the current September ’16 end date.

“However, a report that the central bank may be considering a two-tier tiered system of charges for banks holding cash (similar to that utilised by the SNB), alongside presumptions of additional bond buying have encouraged a spike in the Euribor strip, a sharp widening in US-Bund spreads and an aggressive slide in the EUR.”

Due to sluggish EU economic growth, President Draghi’s repeated dovish comments, and really the inherent weakness of the EUR, the market has cultivated a negative bias towards the currency.

Thus, we expect the EUR to continually weaken on a broad basis ahead of the ECB meeting.

Jeremy Stretch states, “Although the references to prospective ECB policy action are merely a reflection of non-attributable sources, the immediate market reaction underlines a broad negative bias.

“Hence into the ECB meeting expect 2015 lows at 1.0458 to remain in view.  

“Only a spike back above 1.0710/20, likely predicated on elevated risk aversion, (the euro benefitting by virtue of its robust net external balance) would negate ongoing EUR downside.”

Presently, the pair’s exchange rate is around 1. 0580, down 0.66% from its opening.