Date: 15 Jun 2018

Perhaps it was the positioning into the ECB decision, perhaps it was the comparison between what the ECB then had to say and the somewhat hawkish tone that accompanied the Fed rate hike on Wednesday, but euro bulls had an uncomfortable ride on Thursday with a good deal of pre-ECB euro long positioning stopped out in post-ECB trading. As Friday begins the issue for the currency market is whether that sell off in the EURUSD has run its course or does the move still have legs. A good start point for an analysis of that would be to appraise what the ECB actually announced.  If the long euro position into the ECB was predicated on the announcement of an end-date for the ECB’s asset purchase plan (APP) then arguably that expectation was satisfied with the ECB not only looking to a December cut-off point but also announcing that from October until then the monthly purchase amount would drop to 15 billion euros from 30. But the sting in the tail was ECB President Mario Draghi announcing that the ECB isn’t currently envisaging raising interest rates ‘at least through the summer of 2019’  adding for effect that the phrase ‘through the summer’ was intentionally imprecise. That last announcement was arguably the chief driver of the EURUSD sell off, coming as it did with the market seemingly carrying a material long euro position.

However would that announcement, in combination with the APP detail, have had such an effect if short term long euro positioning hadn’t been so pronounced? Dutch bank ING argued Thursday that “the EUR sell off feels a bit much” and sees in general “the lower end of [the] EURUSD trading range in the 1.15/1.16 area this summer.” Japan’s MUFG bank, also writing Thursday after the sell off in EURUSD, felt there was a risk the EURUSD could still trade lower but held that there was “limited further downside potential beyond the recent low of 1.1510.” Traders will have to decide whether the new ECB forward guidance ‘through the summer of 2019’ will continue to trump the impact of the announcement of a December APP cut off date. After such a sell off in EURUSD, even euro bulls might concede that a sharp will be unlikely, given the ECB’s tone, but traders as a whole could conclude there’s room for a degree of consolidation especially with so much short term long euro positioning having been flushed out of the market in the post-ECB price action.

Written by Neal Kimberley, External Currency Analyst.