EUR: Hawkish signal – Danske Bank

EUR crosses generally bid yesterday after the ECB sources story that focus is shifting to controlling rate expectations as QE is set to end, and that the ECB is satisfied with current market pricing, explains Valtteri Ahti, Chief Strategist at Danske Bank.

Key Quotes

“The latter is a hawkish signal, in our view, given what we see as somewhat aggressive pricing of a first hike at present. We would not be surprised to see the EUR rally extend in coming days, albeit it is likely to require more backing from either side for EUR/USD to break the 1.2555 support level (16 February high).”

“However, while a new form of communication may give rise to some volatility in the single currency and lift it short term, an ECB determined to anchor short-end rates could help keep some of the capital reversal, which we have argued could support the euro as policy ‘normalises’, at bay if effectively executed. This could drag out a continued EUR rebound. In USD crosses, focus will now centre on tomorrow’s FOMC meeting; we doubt a March hike and a still reluctant-to-hike-fast Fed will provide much USD strength in itself.”