In its strategy review, the European Central Bank (ECB) chose a 2 percent inflation objective for the medium term. Because of rising front-end rates pricing by the Fed, the EUR/USD has been falling since June. However, the EUR/USD hasn’t appreciated since then, despite the recent drop in US rates, which is perplexing. “From a market perspective, the most important news is that the ECB has switched from an inflation target of ‘close to, but below, 2 percent’ to 2 percent identically, specified over the medium-term and symmetric in nature (i.e. that overshoots are seen as equally undesirable as undershoots),” according to Nomura economists.
“We see it as a marginally dovish move, reinforcing our view that the ECB will need to increase its APP next year as the PEPP is wound down (what the ECB refers to as a ‘forceful'” approach to avoid sub-target inflation expectations becoming entrenched),” says the bank.
“With real rates grinding lower, indicating to a move towards 0.83, we remain short EUR/GBP in relative value terms, given the contradiction from macro signals for EUR and USD.”
“Before evaluating fading price action and resuming macro correlations, we’ll wait for EUR/USD to drop below 1.18 and towards 1.17.” Position reduction appears to be the current risk off in markets, with the triggers for this being unclear.”
“We believe the US rate hike has further to go, and the EUR/USD should follow suit — but first, we need to see if the position squeeze has finally played out, since markets are experiencing a correlation breakdown.”/n
