ECB: Risk-reward favours a modestly higher EUR - ING

Viraj Patel, Foreign Exchange Strategist at ING, suggests that after a relatively dovish message in March, the risk to the EUR at this Thursday's ECB meeting is that President Draghi ratchets up his concerns over the outlook for the Eurozone economy - stemming from either slower cyclical macro dynamics and/or heightened trade and geopolitical uncertainties.

Key Quotes

“In this dovish scenario, we could see EUR bulls retreat en masse as odds for a 2Q19 ECB depo rate hike are slashed further (EUR/USD here could fall back to 1.2100).”

“In the absence of this, we think risk-reward favours modest EUR upside going into the April meeting. A re-iteration of the status quo constructive domestic economic outlook - with growth and inflation expected to broadly recover over the ECB's forecast horizon - could keep lingering EUR bulls excited over the prospects of a mid-2019 rate hike (current implied probability at 60%).”

“Currency investors go into the April ECB meeting less bullish on the EUR. Apart from the positioning of asset managers/institutional investors - which at record net long EUR positioning seems to suggest that these group of investors are playing the 'long game' - the recent lacklustre EZ data and relatively cautious policy comments by ECB officials has taken some of the steam out the EUR's cyclical upswing. Positioning of leveraged funds has turned more neutral, while option markets - as indicated by EUR/USD risk-reversals - also point to less bullish optimism compared to before the March ECB meeting.”

“We think President Draghi will find extremely difficult to talk down the EUR this month.”

“The bottom line is that it will be difficult to see a dovish Draghi-led decline in the EUR given the relatively low expectations going into the April ECB meeting.”