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14 May 2015
Euro news: Doubts on Fed policy lead to a re-pricing in divergence trades – TDS
FXStreet (Barcelona) - The disappointing data rebound in Q2 is raising doubts on the potential rate hike plan by Fed this year, which is dramatically re-pricing QE/divergence trades like EUR/USD and now questioning the 2015 parity outlook for the pair, explain FX Strategists at TD Securities.
Key Quotes
“US data continues to underwhelm, with the April retail sales report the latest casualty. Spending was disappointing across all measures of spending with headline sales printing flat.”
“With the data showing a soft start to Q2, doubts about the Fed lifting policy this year are growing, meaning that QE/divergence trades like EURUSD are getting dramatically re-priced and challenge the prevailing bias that the currency pair can breach parity this year.”
“To be sure, we remain in the September camp but our conviction level is waning and we would look to the June FOMC meeting as the key decision point on Fed hiking prospects this year. Until then, we think that EURUSD is less vulnerable to the downside despite the seasonal tendency for the currency pair to underperform at this time of year.”
“We would note however that we do not find a compelling case for this to be true this year, as the prominence of seasonality in EURUSD is more of a post-financial crisis phenomenon that appears to be tied to portfolio shifts out of European assets from a risk-off environment set by the flare-up of EZ sovereign stresses that have typically occurred during spring and summer.”
“Now that financial contagion risks are better contained and the Eurozone is improving, we think EURUSD is prone to trade in limbo, if not with an upward bias for a little while longer.”
Key Quotes
“US data continues to underwhelm, with the April retail sales report the latest casualty. Spending was disappointing across all measures of spending with headline sales printing flat.”
“With the data showing a soft start to Q2, doubts about the Fed lifting policy this year are growing, meaning that QE/divergence trades like EURUSD are getting dramatically re-priced and challenge the prevailing bias that the currency pair can breach parity this year.”
“To be sure, we remain in the September camp but our conviction level is waning and we would look to the June FOMC meeting as the key decision point on Fed hiking prospects this year. Until then, we think that EURUSD is less vulnerable to the downside despite the seasonal tendency for the currency pair to underperform at this time of year.”
“We would note however that we do not find a compelling case for this to be true this year, as the prominence of seasonality in EURUSD is more of a post-financial crisis phenomenon that appears to be tied to portfolio shifts out of European assets from a risk-off environment set by the flare-up of EZ sovereign stresses that have typically occurred during spring and summer.”
“Now that financial contagion risks are better contained and the Eurozone is improving, we think EURUSD is prone to trade in limbo, if not with an upward bias for a little while longer.”