FXStreet (Guatemala) - Camilla Sutton, CFA, CMT, Chief FX Strategist at Scotiabank noted that the EUR is weak, having traded to its lowest level in almost a year (the September 2013 low was 1.3105).
"German IFO was weaker than expected, but the collapse in EUR came on the back of President Draghi’s comments on Friday, where he shifted course by admitting that medium term inflation expectations had declined by stating that: “Over the month of August financial markets have indicated that inflation expectations exhibited significant declines at all horizons."
"The 5year/5year swap rate declined by 15 basis points to just below 2% ‐ this is the metric that we usually use for defining medium term inflation … the Governing Council will acknowledge these developments and within its mandate will use all the available instruments needed to ensure price stability over the medium term”."
"The ECB’s reaction to falling inflation expectations: President Draghi has previously detailed that a drop in inflation expectations would be met with broad‐based asset purchases; whereas an impairment in the transmission of the ECB stance would be met with LTROs and an ABS purchase program. The June program included an LTRO as well as a suggestion that an ABS program was approaching. Accordingly President Draghi’s Friday comments have opened the door to further policy action by the ECB (the next meeting is September 4th)."
"However with German yields already well below 1% and all European 10year yields at or close to their one year lows; it does open debate on how QE would address the major issues in Europe, particularly the structural ones. Still the anticipation of a policy response by the ECB is currency negative, particularly juxtaposed against an increasingly hawkish Fed. We hold a year‐end EUR target of 1.30."
"EUR/USD short‐term technicals: Bearish—all signals have shifted to strong sell signals and there are no warning signals on the charts. Support lies at the September 2013 low of 1.3105."