Correction in the EUR/USD is likely
A midterm-spread in US-Bunds and US-Europe yields suggests a correction in EUR/USD is likely. This, after the minutes of the last European Central Bank monetary policy meeting triggered an extension of EUR/USD rally to current 1.22 highs. They suggest that the ECB plans to address quantitative easing earlier than was expected. March is too early for the ECB to remove QE bias, as recent inflation data has been subdued. But heading into Italian elections on 4 March, the ECB must keep a reign on interest rates. This also suggests that ECB President Mario Draghi will sanitise any hawkish tone, even if Europe’s growth and inflation are above the ECB’s own forecast.
In Italy, deep austerity has created a solid populist base likely to make itself known in March. Still, the measures have failed to lower debt to GDP (now over 130%, 2nd highest in Europe) or generate strong economic growth. A hawkish ECB could trigger hikes in Italian rates, worsening current economic difficulties.