DailyFx analysts correctly bet against the Euro at the end of March as the single currency fell over 700 pips against the dollar. However, the U.S. government announcing that it would commence quantitative easing measures would lead to a spike higher for the Euro before its current descent, offsetting future profits for those who got in too early. A pick up in risk appetite would also push out the decline for the EUR/JPY as it remained supported throughout the end of the month.
After the U.S. announced their intentions to start buying government debt joining the BoE , SNB and BoJ focus turned to the ECB. The central bank resisted following suit as it stuck with their measured approach and contention that risks of deflation weren’t a concern. They cited stabilizing energy costs and expectations that growth would return by the end of 2009 as the basis for their inactivity. The U.S. government at the G-20 summit asked other nations to increase spending in an attempt to stem the global downturn. President Trichet and European leaders disputed the need for additional stimulus choosing to focus on restoring credit markets, hinting that further easing would be the correct course of action. Fears that the ECB would remain behind the curve jeopardizing future growth led to heavy Euro trading to end March. Deteriorating fundamentals would support those concerns as economic confidence and the CPI-estimate fell to record lows while the German-IFO hit its lowest level in 26 years.
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What Has Changed?
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The ECB reduced rates by 25 bps instead of the 50bps that was expected by markets at its April 2 meeting, but hinted at potential further efforts into more non-traditional measures, which they call credit-easing rather than quantitative easing. The committee would also leave open the door for more rate cuts which many expect will be the other 25bps that they left on the table. However, there appears to be a division on what measures to take as several members have argued that 1% should be the lower limit and non-traditional measures should be avoided. The Euro has also started to lose its correlation to risk appetite as we see in the chart below. The clear trend for the single currency has been to the downside as the DJIA has continued its recent bullish trend. Dailyfx analysts continue to see bearish potential for the single currency as 9 out of 10 chose to short a euro pair this week in their trade picks.
