FxWirePro: Does Fed’s deceleration influence onset ECB’s hiking hopes? Deploy EUR/USD directional hedge ahead of monetary policy season

We articulated a cautiously constructive view for EUR predicated on a dual-sided convergence in transatlantic growth resulting in a less exceptional US and a less mediocre Europe.

The US Federal Reserve is scheduled for its first monetary policy of 2019 followed by a press conference (there would usually be press conferences after every meeting). Fed is most likely to maintain status quo in its funds' rates. Markets want to understand the pause in tightening. Yesterday's drop in consumer confidence is unlikely to worry the Fed much that seems more political than economic. It’s been a slightly dovish approach adopted by the US Fed from the last monetary policy. 

The relatively aggressive late-cycle Fed tightening that the economists had envisaged was expected to be less influential for markets than the onset of ECB hiking in light of the undervaluation of both European rates and the single currency by comparison with the overvaluation in US rates and the dollar. The 1Y target was set conservatively at 1.18, essentially in line with the forwards, albeit we expected more of the euro’s gains to unfold in 2H due to the still weak and uncertain momentum that the Euro area economy was carrying into 2019. 

Unexpected frailty in the European economy contributed a third of the 12 cent drop in EURUSD from its early-2018 peak of 1.25 (exceptional US growth accounted for another third, exceptional Italian politics the remainder) and we wanted to see a renaissance in growth and confirmation of the ECB’s hiking intentions before calling a definitive turning point in EURUSD.

Trade tips: We advocate initiating longs in EURUSD futures contracts of Feb’19 delivery as further upside risks are foreseen in near terms. Simultaneously, shorts in futures of April’19 delivery. Thereby, one can directionally position their FX exposures. The directional implementation of the same trading theme by further allow for a correlation-induced discount in the options trading also if you choose strikes appropriately. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards 70 levels (which is bullish), while hourly USD spot index was at -12 (neutral) while articulating (at 08:47 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex