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Well, after all, it seems puzzling whether levels well above 1.20 for EURUSD and 0.9306 for EURGBP might be too much for ECB President Mario Draghi and his colleagues on the ECB council. Despite the fact that European central bank is not inattentive by one pip more or less if it is concerned about appreciation or depreciation and the possible effect on inflation.
It is the general trend they worry about. And the trend no doubt does not suit the ECB leaders, as the last ECB minutes made clear. That means we can expect to hear comments on the development of the currency at next week’s ECB meeting.
However, these are less likely to run along the lines of “the euro is too strong” and more along the lines of “we closely monitoring the exchange rate” (as in 2014). The higher the euro rises or rose in the run-up to the meeting the higher the likelihood of such a statement being made. In particular as the ECB will now have to notably raise its exchange rate forecast,
The GBP forecasts are downgraded in order to mirror less favorable cyclicals (the fragile growth among G10, the less probability of a near-term rate hike) and also to lodge the upward revisions to the EURUSD forecast. While the forecast for EURGBP is lifted from 0.92 to 0.93-94 by the end-2017 vs 0.90.
The cross is more aligned with EUR at the moment, with 0.9180/70 seen as support on the day. We can see a near-term rebound from these levels but look for the 0.9250 regions to cap for a broader correction back towards more important daily trend support in the 0.9100-0.9060 region. Only a decline through there would do damage to the underlying trend though, with 0.9400-0.9700 the main "flash-crash" resistance zone.
Option Strategies:
We tweak exposure to square off non-functioning cheap option longs and rotate from short USDNOK to a more defensive short in USDCHF, whilst keeping a core long in Europe/USD through cash and options.
Position for a divergence in GBP and CHF through cash and options (sell EURCHF calls to fund EURGBP calls). Short in 2M EURCHF 1.1470 calls against long in 2m EURGBP 0.9210 calls (ATMs).
