Weakness in Euro / Dollar Exchange Rate to be Temporary say Societe Generale, See Base at 1.04-1.05

‘Printing money’ alone is unlikely to be able to weaken the euro – what’s necessary is a helping hand from the Federal Reserve or Brexit argue analysts ahead of the key European Central Bank meeting on Thursday.

• Watch the ECB press conference on Pound Sterling Live here.
• EUR to USD exchange rate falls ahead of ECB meeting as traders cut exposure
• Soc Gen say any weakness in the euro will be temporary but could test 1.04-1.05
• Commerzbank techs targetting decline to 1.0523

A good number of strategists believe the EUR/USD is too high in the lead up to the meeting suggesting markets learnt not to bet against the euro in December where policy measures were deemed too timid.

Strategists believe the highest-probability outcome at this stage is for a decline in the exchange rate.

The use of what are known as non-standard, or unconventional monetary policy measures by the ECB and the BOJ have not been enough to weaken the euro or the yen, according to a recent research note by Societe Generale’s Alvin Tan.

Policies available to the central bank include quantitative easing, a process whereby central banks print money for the purpose of buying bonds or IOUs from high-street or commercial banks, so that it can provide them with more liquidity or cash, with which to lend to businesses and households, to help stimulate the wider economy.

The ECB can also cut interest rates deeper into negative territory in an effort to encourage banks to withdraw their deposits and lend the money instead.

According to Tan such measures have reached the limit of their effectiveness:

“The indirect attempts to weaken the exchange rate through asset purchases and negative rates appear to be hitting the proverbial brick wall. Neither the trade weighted euro nor yen has depreciated over the past twelve months, despite escalating unconventional monetary policies.”

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US Monetary Policy in the Driving Seat

Tan suggests that the main fundamental driver for the EURUSD pair’s rate is American monetary policy as there has been, “a persistent negative correlation between EUR/USD and the US 10-year yield since mid-2013, when the ECB's refinancing rate dropped to 0.5%.”

The volte-face (turn-around) in the Fed’s intentions to hike rates, explains why the euro has failed to lose ground in recent months, perhaps more than any other factor.

The only sign of a possible re-tightening in the Fed agenda, came from a slightly more hawkish speech on Monday March 7, from Vice-Chairman of the Fed Stanley Fischer, however, this was slightly counterbalanced by Fed’s Brainard’s more dovish commentary on the same day.

Given there is little possibility of the Fed changing its stance to a more hawkish slant and announcing it in the days before the ECB meeting on Thursday, this is unlikely to be a factor in the EUR/USD exchange rate calculation around the time of the ECB meeting.

As such Tan argues that even if the ECB announce monetary policy which is an escalation in the non-standard response so far, this is unlikely to substantially weaken the euro for any length of time, and he concludes:

“Further easing is expected from the ECB this week but it is unlikely to push the EUR/USD exchange rate lower durably. We do not expect EUR/USD to break below the 1.04/1.05 low reached in 2015 over the course of this year, short of a Brexit scenario.”

One possible strategy response to Tan’s analysis is therefore to wait for the euro to fall and then buy the dip.

Commerzbank: Looking for Euro-Dollar Decline to 1.05

While Soc Gen recommend buying dips Commerzbank's Axel Rudolph is looking for the pair to decline furhter.

The technical analyst notes the EUR/USD has been rejected by the 200 day moving average at 1.1047.

"Between here and the 1.1087 September low is quite a pivotal area. Ideally it will again provoke failure and as long as this is the case we will continue to target the December and March 2015 lows at 1.0523/1.0457," says Rudolph.

While capped by the 1.1105 September 23 low, EUR/USD will remain directly offered.

"Above here will neutralise the immediate outlook. We continue to regard the 1.1377 February peak as an interim high," says Rudolph.