Today should be a bitter day for Mario Draghi. After all that he has done – and, more than that, after all that he has promised to do – the EUR has been more resilient than anyone could anticipate. After all, the ECB has been buying almost all kinds of assets aggressively, and still the EUR has been resisting, with inflation not picking up in the Eurozone.
As we learn about the Eurozone Consumer Price Index (CPI) YOY today, an expected -0.2% print should confirm that Europe goes on flirting with deflation – while desperately trying to unleash the dangerous inflation monster that Draghi seems so fond of.
The truth is that the problem in the Eurozone cannot be solved by the ECB. Disastrous demographics combined with an over-regulated and over-taxed economy. A context where the wrong kind of migrants comes in and the right kind of migrants goes out (highly qualified people are leaving Spain, Portugal, Italy and Greece, for example, whereas poorly qualified people are coming into these and other Eurozone countries). A banking system that is way over-leveraged and exposed to large amounts of debt of technically bankrupt states.
Whatever Draghi does, this is an economy headed towards a brutal correction.
Still, Ridge Capital Markets believes that the ECB will not take yet another blow in silence. Despite German opposition, the ECB, along with the BOJ, are leading the monetary experimentalism in an unrestrained way, and the Eurozone’s need to have a lower EUR and higher inflation should only be restated more firmly today.
This all makes us feel very bearish about the EUR. We reiterate that, as dovish as the Fed may sound recently, at the end of the day there is still an important policy divergence. The ECB is easing aggressively, whereas the Fed isn’t. We therefore recommend traders to bet on the USD/EUR, which, in the last week, has already started a recovery that we anticipate will only get stronger.
Today we will also learn about some economic data coming from the UK, namely Claimant Count Change, and the Average Earnings Index. In trading terms, we expect the GBP to stay where it has been – in the trading range between 0.78/0.79 (EUR/GBP) and 0.685/0.695 (USD/GBP), because the markets are in a wait-and-see mode.
There is a high degree of complacency regarding the ‘Brexit’ scenario, which the markets are not pricing in – despite the fact that pro-‘Brexit’ voices in the UK are only rising and becoming more audible, not less.
Still, at Ridge Capital Markets we believe far more in a long USD/GBP tradable move than on a EUR/GBP long position. We believe that traders can rely on the USD against the GBP for profits, but we just don’t see any reason to place that bet on the EUR vs the GBP.