Downside risks for EUR – AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that we should still see significant downside risks associated with Italy with further potential negative fallout for the EUR and indeed wider market consequences.  

Key Quotes

“We need to keep an open-mind; the timing of the EUR response to these risks may just have become harder to predict.”

“The slump in the EUR after the ECB meeting might seem a surprising development given that the ECB caught the market unprepared by reducing its pace of purchases. There were dovish elements to the ECB meeting, such as a slight fall in short-term rates related to tweaks to maturities and removing the minimum yield on purchases, but on balance, the ECB policy change is somewhat less accommodative and in different circumstance might have boosted the EUR.”

“The short-lived spike in EUR on the ECB announcements and deep fall during the press conference may reflect the increased political uncertainty in Italy since last weekend. The positioning wash-out after the ECB meeting may have allowed the market to respond more to this ongoing political risk.”

“In a broad sense, the EUR is still trading close to the low end of its sideways range over the last two years; it may be building for a break of the 1.05 level setting in train a deeper fall towards parity.  This might be consistent with the steady rise in the USD yield advantage over EUR this year and political risks in Europe that still threaten the long-term viability of the monetary union.”