Date: 12 Mar 2018

Given that European Central Bank (ECB) President Mario Draghi said last week that the ECB “Governing Council will continue to monitor developments in the exchnage rate and financial conditions with regard to their possible implications for the inflation outlook,” traders might logically conclude that the ECB might be happier now that the euro/dollar (EURUSD) exchange rate has come off slightly. Of course, in light of Friday’s strong US nonfarm payroll figure, the ECB might have hoped for more of a US dollar rally versus the euro than actually occurred. The ECB must also be mindful, as is the currency market, that it cannot keep kicking the can of policy normalisation down the road indefinitely.

Traders will be aware that while the economic circumstances of euro zone members such as Italy might still lend themselves to support from the ECB’s ultra-accommodative stance, others, notably Germany, do not. Germany’s central bank, the Bundesbank, made the point in February that real estate prices in 127 German cities may be between 15 and 30 per cent overvalued. In the very short term however the currency market on Monday may find that sizeable option expiries shape the price action in EURUSD until they roll off at 1500GMT. In the five pip 1.2295-1.2300 range there are purportedly some 1 billion euros of expiries with another 1 billion said at 1.2275. Meanwhile there are said to be some 600 million euros of expiries between 1.2350 and 1.2360 with another 500 million at 1.2400.

Written by Neal Kimberley, External Currency Analyst.