Fundamental Forecast for EUR/USD: Neutral
– EUR/USD was able to rally despite a strong headline February NFP figure.
– The retail crowd remains net-short EUR/USD, leaving the sentiment forecast bullish.
– As market volatility ebbs, it’s a good time to review risk management principles.
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After a rough February, the Euro settled during the first week of March, as market participants prepared for what should be a defining moment in the negative interest rate policy (NIRP) era: will the European Central Banks lower rates further into negative territory as otherwise conventional policy tools prove ineffective? Certainly, over the past three- to four-weeks, as the Euro has receded, risk assets (particularly commodities and equity markets) have rebounded amid hopes that the ECB will introduce new easing measures on March 10, and that the Federal Reserve will keep rates unchanged on March 16 – thereby derailing its forecast for four rate hikes this year in a more dovish direction.
While ECB and Fed policy is moving in opposite directions at current time, both face the same issue, an issue that central banks are facing globally: they are running out of policy tools thanks to years of restrictive fiscal policy, leaving central banks as the only game left in town (save Canada – and just look at how the Canadian Dollar has performed since the Bank of Canada’s January meeting). For the ECB this week, it is desperately in the need to surprise short-term traders and longer-term investors alike.
In some regards, the market has effectively priced in the first half of expected easing from the ECB: a cut to the deposit rate. This may have been priced in starting right after the January ECB meeting, when President Mario Draghi suggested that the central bank would reassess its policy in March. So, if a deposit rate cut is coming on Thursday, the market has already priced it in:
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