The European Central Bank made an unprecedented effort to weaken the single currency on Thursday. Yet EUR/USD strengthened, posting its biggest daily advance in 3 months.
The measures announced by the ECB included a cut in its key interest rate to a record low of 0.15% and the deposit rate – to -0.1%, 2 rounds of targeted LTROs and suspension of SMP sterilization. All this was expected. We have been talking about this for weeks, so there’s actually nothing new and really not too much cause for the euro to weaken.
In addition, the ECB said that it will work on plans to buy asset-backed securities based on bank loans. This should be the strongest measure in the central bank’s arsenal. However, we don’t know when QE will take place – this year or later? And that's one reason why the euro is so resilient.
I don’t think that the ECB wants the euro above $1.38. After the May meeting, Mario Draghi mentioned that the high euro was hurting the central bank’s effort to increase inflation. This means that the regulator will probably need to come up with further easing. At the same time, it’s worth noting that the ECB reduced inflation forecasts -- to 0.7% this year, 1.1% in 2015 and 1.4% in 2016. These projections do not incorporate measures announced Thursday and easing might help to increase consumer prices.
At this point, when I look to the EUR/USD chart in the long-term, I expect the pair to stay above its 200-week MA at $1.3400. On the upside, $1.40 is the limit as Draghi may give details about QE at the next meeting to prevent such a high exchange rate.
Now that we are more or less done with the ECB, we should focus on the Fed and its June 17-18 meeting. The US central bank continues tapering QE. Now it’s buying $45 billion in bonds a month -- from $85 billion in December. Still, the Fed is unlikely to share information about the interest-rate hikes, which will restrain USD appreciation.