Euro under pressure

31 March, 2017

The European currency extended its fall after the ECB official, Yves Mersch, denied speculations about QE tapering, making it clear that the regulator is not yet going to change its dovish views. The euro index sank by 0.23%, posting a considerable decline against the dollar, while ten-year German bonds, an indicator of market inflationary expectations, rose in price, as hopes for an early rate hike were dispelled by ECB officials.

It is possible that the March meeting of the ECB was misinterpreted by the markets, following Mario Draghi’s positive comments on the state of the economy. The official’s confident tone helped move the euro into a growth phase, but later it became clear that no change in monetary policy is yet to be expected by the ECB. The next round of dollar strengthening on the basis of strong US statistics and hawkish Fed statements, will likely lead to a steady weakening of the EURUSD pair to the range of 1.05-1.06 in the near future. The political risks associated with the elections in France could also aggravate the situation.

The US currency was supported yesterday by comments of the president of the Federal Reserve Bank of Chicago, Charles Evans, who stated that the rates could be increased 2 to 4 times this year. The Federal funds futures rate give a 50% probability of a July rate hike. In the event that the dollar index manages to gain a foothold above the level of 100 will surely affect its dynamics in the short term.

Outages in oil production in Libya caused a decline of 252 thousand barrels, triggering a rise in oil prices, but later they resumed selloff. WTI futures fell 0.14% to $49.44 while Brent retreated 0.36% to $52.35.  Net positions on oil fell from 433K to 418K for the week ending March 24th, signalling that the long-term bet remains bullish, but in the short term, the correction may be extended.

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