A 1.08 floor?
As we wrote yesterday, a surprise interest rate cut in Switzerland from the Swiss National Bank (SNB) has jolted markets into life. Over the last month, the probability of interest rate cuts at major central banks has been falling consistently. This surprise cut from the SNB last week has awoken investors to the possibility that the start of the monetary loosening cycle may be closer than they were beginning to think. Accordingly, futures markets now show a non-negligible probability for an interest rate cut at the next Bank of England’s next decision, to name but one significant change. Until the SNB’s decision last week, this was all but written off as impossible.
However, the central bank most exposed to speculation on the back of the SNB’s decision to cut is the ECB. This is because the economic and financial dynamics amongst the two economies are normally seen to be heavily intertwined. A cut at the SNB therefore leads to speculation that the ECB could be the next to cut. Looking at major Euro crosses, and EURUSD in particular, we could be forgiven for concluding that there has been an element of Euro weakness of late. However, look at a trade-weighted Euro index for the past month and we would reveal the image of a far rosier Euro, up 1.5% in the last month.
The Euro’s short-term fortune will ultimately depend upon the ECB, and how this central bank positions itself for the tightening cycle. However, with a price floor seeming to have emerged in EURUSD at 1.08, there is a case within which the Euro holds its ground. Positioning behind the Euro is still net long. Encouragingly, the extent to which speculative positioning favours the Euro’s appreciation has fallen in size, limiting the risk that a significant liquidation of long positioning could move EUR spot prices materially lower.
Discussion and Analysis by Charles Porter
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