In the race to the bottom, the currency war took on an added spice this week, as president Draghi of the ECB decided to prep the market for more potential easing from the governing council, in response to the prolonged slowdown in the Eurozone. Rate futures are now pricing in a 10bp cut later this year, with fellow governing council members also leaving the door open to fresh asset purchases. The timing of the communication was not lost on US officials, with the US president quick to criticise the ECB’s rhetoric.
Not suffice with pressuring his own Fed governor, Donald Trump turned this week’s policy focus into a currency war. And he may have won. Fed chair Powell has also come out of this unscathed – for now at least – with Wednesday’s evening’s dovish signals from the Fed reining in the USD whilst keeping equity markets in a positive mood – indeed, the S&P now eyeing fresh record highs. Despite rate differentials, we now see the EUR rate vs the USD looking to push higher, not least of all due to much of the Eurozone negativity priced in. Valuation levels see EUR/USD some way below PPP, so given convergence in rates (irrespective of absolute levels), the EUR has some room to appreciate and we can certainly accommodate a move back to 1.1500 over coming weeks, perhaps months.