EUR to weaken against USD if European Central Bank tones down its hawk
By Arnaud Masset
While the Euro has climbed some 3.5% against the US dollar in the past month to the 1.15 EUR/USD range, we expect a short-term weakening to around 1.12 in the wake of today’s meeting of the European Central Bank.
Why? Investors have piled into the EUR with the expectation that the ECB will end its ultra-accomodative monetary policy and begin tightening money supply. We too believe the ECB is headed in the hawkish direction, but we also believe that investors have overegged their position. Even though the ECB cannot walk out of this meeting without giving a little clarity on tightening, we think that the ECB won’t match the market’s hawkish expectations. We expect the ECB: 1) to move extremely slowly towards tapering to avoid roiling markets; and 2) to move more slowly in tightening the Euro than the US Federal Reserve tightens the US dollar, to dampen the rise in EUR/USD.
Stay bullish USD/JPY, as Bank of Japan softens inflation forecast
By Peter Rosenstreich
From its current level of just under 112, we expect the USD/JPY to retest resistance levels of 114.5 by September.
The Yen’s weakening was foreshadowed by yesterday’s Bank of Japan Monetary Policy Meeting. As we expected, the BoJ held to its loose monetary policy while lowering its outlook for inflation and raising its forecast for economic growth. The softer inflation forecast should pull bulls away from the JPY.
As the BoJ stays loose on the Yen, and the US Federal Reserve begins to tighten the US dollar by reducing its USD 4.5 trillion balance sheet, this will push the USD/JPY higher.