The Euro Ahead Of Potential Easing

EUR/USD
Expectation of further policy easing by the ECB remained rife this morning as ECB sources, Mersch and Praet outlined potential policy measures the ECB could turn to in June, pointing to rate cuts, further LTRO operations and even ABS purchases. However in spite of further flattening of the EGB curve, which saw the yield on the benchmark Bund drop to its lowest levels in 12-months, below 1.4% level, failed to weigh on the pair given the lack of commitment regarding the potential introduction of an asset purchase programme by the ECB as early as June. At the same time, broad based GBP weakness stemming from Carney’s attempt to downplay the need to raise rates before the spare capacity is reduced further and saw EUR/GBP pull back of multi-month lows, ensured that the pair remained in a range-bound trade.

GBP/USD
A less than impressive UK jobs report, which showed that wage growth slowed to 1.3%, together with Carney’s reiteration that the Bank would like to see further reduction in spare capacity before raising rates resulted in GBP underperforming its peers on Wednesday. These comments from Carney managed to poor cold water over speculation earlier this week that the central bank would bring forward its interest rate hike expectations. As such, markets are now pricing in an interest rate hike in March 2015. Before the QIR markets were pricing in a hike in Feb 2015 and the second hike in July 2015 from June 2015. As such GBP/USD broke firmly below the key 1.6800 handle and towards the 50DMA at 1.6723. Both the jobs report and the QIR set pairs tone for the session and ensured it finished London trade firmly in the red.

USD/JPY
Unfavourable interest differential flows contributed a large proportion of todays price action as the aforementioned surge in Bund prices saw both the German and US 10-yr. yields trade lower with the US yield falling below the key 2.6% level. As such USD/JPY broke below the 102.00 handle although, momentum to the downside was temporarily halted by bids at the 101.90 level. In terms of economic commentary, Goldman Sachs revised their BOJ call as they now no longer see the BOJ easing, previously GS saw BOJ easing in the near future. From a technical perspective, prices are currently some distance away from the pairs DMAs although could look to tests last weeks lows around the 101.50 handle if the move continues. Looking ahead, participants are now looking out for the release of Japanese GDP which is expected at 1.0% vs. Prev. 0.2%.