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 Europe disappoints and flows to remain EUR negative for now – MUFG

Analysts at MUFG Bank, point out that many factors in place point to continued downside risks for the EUR/USD pair and for a test of the pair to the March low of 1.0636.

Key Quotes:

“The only agreement reached was to carry on the discussions with leaders passing the focus of creating the plan to the European Commission. So taking a positive angle on this we could conclude that a ‘Recovery Fund’ is on its way, and we do believe something will get done (…) But this process is going to take time and what is clear to us at this point is that the ECB is going to have to do more to support the markets in the meantime. Is EUR 750bn under PEPP large enough? More QE by the ECB will be required. That might not happen at next week’s meeting given the forecast update will be in June and by then more will be known about government policy support and the extent lockdowns have reversed.”

“Outside of the extreme volatility in March, EUR/USD is now trading at levels last seen in April 2017 and we see this downward pressure persisting for now. Part of the downward pressure may still be emanating from central bank selling. The SNB looks to be actively rebalancing its intervention to support EUR/CHF. Data released by the SNB for Q1 showed USD holdings in reserves increase marginally from 35% to 36%. EUR holdings also increased from 39% to 40%. The limited changes suggest the large scale intervention in Q1 (mainly March) of around CHF 35bn was rebalanced. That would imply the SNB were sellers of EUR/USD. That flow alone wouldn’t necessarily influence EUR/USD but other central banks are likely selling also. Fed holdings of USTs for foreign CBs fell by USD 150bn in March through to 8th April, a sign of CB USD selling intervention. If these central banks want to maintain EUR compositions relative to USD, then this would involve EUR/USD selling.”

“It is also notable this week to see the continued rise in EURIBOR. The 3mth rate has jumped from -0.49% in March to -0.19% yesterday, but retraced 3bps today, but credit risks are escalating. The EURIBOR/EOINA spread is at the highest since the debt crisis in 2012.”
 

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