EUR/USD: A Tactical Short; ECB Not A Catalyst For Further Upside – Danske

The ECB is more optimistic on growth but the downgrade of inflation projections hurt the euro. What’s next?

Here is their view, courtesy of eFXnews:

Danske Bank FX Strategy Research argues that today’s message from the ECB is not going to be a key catalyst for further EUR/USD upside for three reasons.

“First, ECB rate hikes will be deemed far away by the market as long as euro area inflation struggles to tick higher – and a first rate hike needs to be eyed in order for the upside potential in notably EUR/USD from fundamental factors to be unlocked on a larger scale in our view. This should be a story for late H2.

Second, speculative positioning has turned net long the single currency and likely some longs were liquidated today, driving part of the initial drop in EUR/USD. If cyclical momentum in the eurozone wears off in the coming months the risk is that sentiment could reverse somewhat and fuel EUR selling again.

Third, a Fed that will likely at the meeting next week confirm its determinedness to move on with hikes and balance-sheet reduction down the road could lead markets to reassess the rather soft pricing of the fed funds rate currently in place. As a result, USD strength could return temporarily in the summer,” Danske argues.

In line with this view, Danske still recommends tactical short EUR/USD* targeting a move to 1.0850.

“We remain tactically short EUR/USD for short-term dip on June reality check – and maintain our call for a summer dip in the cross,” Danske advises.