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EUR/USD market could lapse into fatigue - Commerzbank

FXStreet (Córdoba) - Ulrich Leuchtmann, analyst at Commerzbank comments that domestic economic issues have lost much of their influence on EUR exchange rates with the result that EUR/USD volatilities could continue falling.

Key Quotes

“By proclaiming a de-facto balance sheet target, ECB President Mario Draghi has already announced the additional liquidity the ECB wants to provide (around 1 trillion euros). The allocation of this volume on ECB measures already underway (TLTRO, ABSPP, CBPP3) and a potential QE programme is of minor importance to the FX market. This is because liquidity measures mainly affect exchange rates via the liability side of the central bank’s balance sheet.”

“But this also means that EUR exchange rates are now hardly driven by changes in the QE probability. Only declining inflation expectations (which could trigger an increase in the €1 trillion target) would put additional pressure on the euro”.

“On the USD side, the minutes of the October FOMC meeting,which will be released next
Wednesday, should be interesting. After all, the corresponding FOMC statement was interpreted as surprisingly hawkish. But this also means that markets could once again ignore the hawkish passages in the minutes as already priced in and instead fling themselves at some dovish remark or other that will inevitably crop up given that there is a small but vocal group of doves on the FOMC”.

“All in all, this probably means that – similar to last summer – the EUR/USD market could lapse into fatigue. Short EUR/USD volatilities therefore have new downside potential in the near future – but only until the market starts to price in more aggressive Fed rate hikes than currently”.

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