Analysts at HSBC explain that tactically, EUR-USD is at a very interesting juncture with questions about whether the exchange rate may be about to sustain its move into a new trading range where 1.0820 forms the base rather than the resistance.

Key Quotes

“We have long had our doubts, and we expect EUR-USD to remain roughly within a 1.05-1.08 range with the low side likely to be tested first. The market risks being complacent about European politics and also may be wary of pushing too far when it is unsure quite how hawkish the ECB actually is.”

“There is likely little or no political risk priced into the EUR currently. The opinion polls continue to suggest that while Le Pen may make it to the second round of voting in the French election, she is likely to be defeated by a wide margin.”

“Further slips in the polls for Le Pen would likely have little impact, but any sign that momentum is moving Le Pen’s way would see EUR sell off sharply. It would clearly take a big move for Le Pen to look like a probable victor, but a high risk event can still be potent even if it is a low probability. With the 1st round vote on 23 April looming larger, the sensitivity is likely to grow.” 

“We also believe that interest rate expectations have moved too swiftly in a hawkish direction, taking the EUR higher. In the early part of March, the market has added 20bp of tightening into its expectations for where rates will finish 2018.”

“We suspected this move was premature, and we have already seen a partial reversal. The speeches on the topic of exit feel more like a description of process options rather than an attempt to recalibrate the market’s expectations of when the tightening might begin. Instead, most rhetoric about the economy has sought to remind the market that the assessment has not changed in recent months. It has emphasised that while growth is looking better, underlying inflation and wages remain soft. We expect this narrative to be retained in the run-up to the 27 April ECB meeting when ECB President Draghi will likely repeat it.”

“The upward momentum in EUR-USD has faltered at the 200-day MA. We think it is more likely that it grinds lower during April, though not to any startling extent, settling back into a 1.05-1.08 trading range after its brief March escape.”