EUR/USD now looks to the ECB – Danske Bank

Senior Analyst at Danske Bank Kristoffer Lomholt sees the next ECB meeting to be key for the pair in the near term.

Key Quotes

“EUR/USD retreated a little yesterday following the post-US payroll highs on Friday and the direction in the cross from here will depend crucially on the ECB’s stance on Thursday”.

“Even if the ECB goes for a slightly more hawkish introductory statement at the meeting, we maintain that as long as the wording regarding policy rates is left unchanged, the euro should stay calm as the key for FX markets will be the signal of a change in stance on policy rates and a first move towards an exit from negative rates”.

“Indeed, following a significant uptick in the effective euro during the month of May, the ECB should be wary of fuelling further currency strength near term. While fixed income markets may have become somewhat complacent on the ECB, the market sentiment change towards EUR/USD in mid-May due to reversing political risks and euro growth and equity outperformance recently point to the risk of a short-term correction lower in the cross, in our view, not least if cyclical momentum starts to fade within the Eurozone”.

“With recent additions to speculative EUR, the risks in the pair are increasingly on the downside from a positioning point of view”.