- The ECB left the policy rates unchanged in spite of the recent interest rate cuts by its peers,
- ECB failed to relieve market fears, euro dropped on recession fears and concerns surrounding ECB relying upon fiscal stimulus.
- EUR/USD has been supported in NY on the prospects of the Federal Reserve needing to increase its balance sheet.
EUR/USD is attempting a comeback, rallying from the lows of 1.1055 to a session high of 1.1216 withing the day’s range of 1.1055/1.1336. Volatility is tremendous and the baton is changing between the hands of the bulls and bears with intense velocity, and not just in the FX space. US equities bounced off their lows as well on the news that the New York Fed has offered $500 Bln in a three-month repo operation, to settle on March 13, 2020, in response to a squeeze on dollar funding whereby money markets have started to show signs of stress (widening of the EUR cross-currency basis swap). Such a move is bringing back prospects of QE. (The Fed started to shrink its balance sheet last year and has plenty of space to grow it back to the peak of 25% of GDP from levels near 19% today). Such prospects are weighing in the DXY which has fallen from a recovery high of 98.31 to a fresh NY session low of 97.33.
Meanwhile, the coronavirus spread continues and is causing widespread panic. 133,069 world-wide cases, 4,947 deaths and 68,895 recoveries, so far. Risk-aversion continues to dominate the financial markets on Thursday and the carry trade unwind will likely continue to support the euro, CHF and yen. However, EUR/USD looks vulnerable following the ECB’s policy decisions:
- The ECB left the deposit rate unchanged at -0.50%, while keeping the refi rate at 0.00%.
- The existing asset purchase programme will temporarily be expanded. An additional EUR 120bn in purchases will be conducted through the end of the year. These purchases will be mainly aimed at private sector.
- Additionally, the ECB announced very cheap LTRO loans through June, as well as an easing of the TLTRO-III conditions and costs for the period June 2020 to June 2021.
“Our main market thesis here is that global investors will reward currencies backed by authorities that show both the willingness and ability to support the economy. Those that are not, will most likely be punished. It seems the EUR is now firmly cemented into the latter category,” analysts at TD Securities argued.
Analysts at TD Securities noted the break below near-term support at 1.1095 which points to further declines on a daily close below that mark. “With the February 20 lows of 1.0778 in mind, the next objective for a move lower would be the 1.0952/92 support zone. At this stage, we may need to see a push back to re-test the recent highs near 1.15 to revisit our short-term tactically bearish view, but we emphasize the outlook remains highly uncertain and subject to abrupt change.”