Article / 12 January 2018 at 9:15 GMT

FX Update: Euro surges after ECB minutes, USD eyes CPI —#SaxoStrats

Head of FX Strategy / Saxo Bank
  • ECB's December meeting minutes point to policy shift, drive euro higher
  • ECB now expected to shift goalposts on language describing end of QE
  • US December CPI seen pivotal for struggling USD
  • US core CPI is expected to have increased 1.7%; data due at 1330 GMT

Euros and dollars
 The ECB delivered a shocker in its December minutes on Thursday. Photo: Shutterstock

By John J Hardy

The minutes of the European Central Bank's December meeting triggered a stark reassessment of the ECB’s anticipated policy path and whether we might get a notable shift already at the January 25 meeting. 

In addition to the clear recognition in these minutes that the EU economy has developed a considerable head of steam, the explicit mention that guidance will need to be reassessed, shocked the euro back to the strong side, not least because of the wording (“the language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in 2018.”) This clearly spells out that the ECB is going to shift the goalposts on the language describing the end of quantitative easing, and the market is even dramatically bringing forward rate hikes and the pace of interest rate rises as well. 

The December 2019 Euribor STIR, for example, priced in 6-7 basis points higher interest rate relative to the previous day’s close. This was the largest one-day shift in expectations since ECB president Mario Draghi’s speech in Sintra, Portugal in late June last year. That speech saw EURUSD rocket above 1.1300 and rise in nearly a straight line to 1.1850+. Whether this latest shock sees a similar move may hinge on today’s US December CPI and retail sales data. The US dollar is on its knees, and weak data could be the coup de grace.  

US core CPI is expected to have increased 1.7%, while there is considerable anticipation that the CPI will rise soon, based on more leading inflation indicators such as the ISM prices paid and the New York Fed’s underlying inflation data series. But does that uptick start with the December CPI data or not until February of next year or later? That core reading has been mired in the 1.7-1.8% “range” for seven months, so the print today almost cannot avoid surprising. Unchanged or lower and it is hard to see what would hold the USD up, unless retail sales for the important Christmas shopping month of December are a shocker. Keep in mind that US markets are closed on Monday (Martin Luther King Jr. day).


EURUSD is poised near the highs for the cycle ahead of today’s pivotal US data and a three-day weekend for the US. A clean break higher on indifferent to weak US data would offer the most compelling setup for significant follow-through higher into 1.2300+ and even 1.2500 in the weeks ahead.
Source: Saxo Bank 

The G-10 rundown

USD – the US dollar is on its knees. Will today’s data throw it a lifeline or see a fresh wave of selling? We lean on the downside risks if the CPI disappoints.

EUR – the ECB minutes have triggered the sharpest reassessment of ECB policy potential in half a year, so we need to respect the move at face value as this provides strong fundamental support for further strength. Note how the euro has also rallied nearly across the board (save for versus the Scandies so far – very interesting for the latter).

JPY – the yen interest is fading rapidly as the ECB minutes have grabbed all the attention, but the USDJPY situation remains interesting (range low around 110.85) and could be easily as reactive or even more reactive on a particularly negative US data surprise today.

GBP – sterling remains passive to developments elsewhere, though cable has established support below 1.3500 ahead of US data today, and UK interest picks up next week starting with Tuesday UK December CPI and December retail sales on Friday.

CHF – the ECB reassessment shifts the odds back higher that the upside path in EURCHF gets more interesting from here. Can we finally break the bounds of the lazy, rising channel?

AUD – the week ahead is interesting as AUDUSD is poised around the final important 61.8% Fibonacci area just under 0.7900, and we have key US data up today and important employment data from Australia next Thursday.

CAD – Nafta fears are holding back CAD relative to its peers. Limbo here until the other side of the US data and above 1.2600 or below 1.2400.

NZD – very firm and threatening the 200-day moving average in AUDNZD and the last shreds of resistance in NZDUSD (61.8% Fibo at 0.7261). The currency is clearly enjoying the white-eyed risk on global backdrop.

SEK – a critical day for the krona today as the CPI release – likely out before pixel-time for this report, will trigger a stand or fall for SEK in the 9.80 pivot area in EURSEK.

NOK – NOK has held well, given the shock to the steep EUR rally yesterday. Watching whether 9.60 area holds if EUR continues to blast stronger into the weekly close.

Upcoming Economic Calendar Highlights (all times GMT)
  • 1330 – Canada Dec. Home Price Index 
  • 1330 – US Dec. CPI (core exp: 1.7% YoY) 
  • 1330 – US Dec. Retail Sales 
  • 1630 – ECB’s Weidmann to Speak 
  • 1700 – US Fed’s Harker (non-voter) 
  • 2115 – US Fed’s Rosengren (non-voter) 
  • US decision deadline on Iran sanction relief 

— Edited by John Acher

John J Hardy is head of FX strategy at Saxo Bank


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