Yes, there are plenty of good arguments for being a euro bull, but none of them matter right now, Bloomberg’s Mark Cudmore wrote overnight, as the common currency remains near the lows hit after Thursday’s ECB decision.
To be sure, the move lower wasn’t hard to see coming. Between the still-simmering Catalonia crisis, Draghi’s knack for making the market believe whatever he wants it to believe (which in this case is that a taper is dovish), and the fact that in the final analysis, the ECB is still growing the balance sheet while the Fed is letting theirs run off, EURUSD is likely to remain under pressure at least in the near-term.
Throw in the prospect of tax reform in the U.S. and the likelihood that the Fed is going to hike again in December come hell or high water, and it makes sense for EURUSD to take a breather (maybe even an extended one) after the rally we saw in the first 9 months of the year. And don’t forget that positioning is stretched (watch the CFTC data this evening to see if that changed materially through Tuesday).
With all of that in mind, find Cudmore’s latest below…
Structural long-term arguments for being bullish EUR/USD, while entirely logical, are largely irrelevant right now. Investors are enthusiastically adopting the concept of a correction in the pair and won’t be easily dissuaded.
- The dollar suddenly has several things going for it while traders have belatedly agreed the ECB is dovish and Catalonia might be a problem
- Narratives often dominate fundamentals for weeks at a time. Often, old data will be looked at in a new, supportive light when the story shifts, while fresh, contradictory information is dismissed
- Same as for many other inputs in financial markets, it’s the second derivative of the narrative flow that matters, not the underlying direction
- Whoever the Fed chair is, a December rate hike seems inevitable. Depending on Trump’s nominee, long-end yields may drop sharply, but front-end rates won’t. Even the dovish candidates — Jerome Powell or Janet Yellen — are part of the committee that’s laid out guidance for four rate hikes between now and the end of 2018
- Tax reform may never arrive, but tax cuts probably will. In the context of next year’s mid-term elections, it’s hard for U.S. politicians to aggressively fight for budget neutrality over putting money in their constituents’ pockets
- The ultimate economic impact of any watered-down agreement may be minimal, but that’s a trading theme for another month. The positive sentiment of domestic policy potentially getting passed under the Trump administration is what markets care about now
- The ECB was always going to keep its options open and try to sound as dovish as possible. They delivered exactly as anticipated on Thursday but investors have only just decided to recognize this message
- The Catalonia crisis has looked the same for a month now. With both sides maintaining a strong stance, the threat of a catastrophic misstep always loomed large. Traders are now acknowledging that tail risk
- Sometime in the future, current- account balances, growth momentum and currency valuations may return to support EUR/USD but its prospects look bleak for the weeks ahead