Funds at main FX crossroads after shock ECB pivot: McGeever


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ORLANDO — If greenback bulls had grown complacent that the relentlessly hawkish shift in Fed expectations lately would prolong its rally for a number of months extra, they received a significant wake-up name final week from the ECB.

Unthinkable just a few weeks in the past, the door to a euro zone rate of interest hike this 12 months is now open after European Central Financial institution chief Christine Lagarde on Thursday acknowledged that inflationary pressures are unlikely to ease within the close to time period, noting: “The state of affairs has certainly modified.”


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This, certainly, adjustments the state of affairs for the FX market.

The euro’s standing as a perma-funding forex is over, or near it. With one of many world’s most dovish central banks now not so dovish, the upside for the euro could possibly be appreciable.

However after years of detrimental rates of interest, a extra bloated steadiness sheet than the Fed’s or Financial institution of Japan’s, and steerage from Lagarde lower than two months in the past {that a} price hike this 12 months was “most unlikely,” how deep does this new-found hawkishness run? Might one other coverage mistake be looming?

That is the crossroads hedge funds and speculators on the U.S. futures markets discover themselves at.

The newest Commodity Futures Buying and selling Fee information for the week ending Feb. 1 present that funds trimmed their internet lengthy euro place to 29,716 contracts from the earlier week’s 31,560.


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Present euro positioning is near its most bullish in virtually six months, however precedes the ECB assembly, and might simply be prolonged. Funds constructed up significantly larger euro longs in 2017, 2018 and 2020, and can accomplish that once more in the event that they assume the ECB will stroll the speak on charges.

Euro cash markets at the moment are betting on 25 foundation factors of price hikes by the ECB’s Sept. 8 assembly, and 50 bps by December, which might convey the deposit price as much as 0% by year-end. Sources advised Reuters that some ECB policymakers even needed to start out tightening coverage final week.

The euro jumped 1.2% in opposition to the greenback on Thursday, its finest day since March 2020, and rose 2.7% on the week, its finest week since March 2020. Excluding the pandemic-fueled gyrations of practically two years in the past, it was the euro’s finest week since 2016.


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Deutsche Financial institution on Thursday closed its brief euro commerce and suggested purchasers to go lengthy in opposition to the greenback, arguing that Lagarde “clearly signaled a pivot from slow-moving calendar-based steerage to one thing much more energetic.”

A number of different banks instantly modified their ECB forecasts too.

If the euro’s near-term outlook in opposition to the rested solely on the ECB’s volte-face, maybe the one debate would possibly encompass the extent of its positive factors. However in overseas trade there may be at all times the opposite aspect of the commerce to think about, on this case the greenback.

The U.S. price outlook was additionally thrown a curve ball final week, within the form of a blowout employment report which confirmed virtually half one million new jobs and surging wage progress in January, and big upward revisions to the earlier two months’ job progress.


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The U.S. cash market curve is now totally pricing in 5 quarter-point hikes this 12 months, and a 35% likelihood of a sixth. Perhaps Financial institution of America’s daring name for seven will increase just isn’t so outlandish in any case.

This might inject new life into the greenback, which had began to float from final week’s 19-month excessive in opposition to a basket of currencies even earlier than the ECB shock on Thursday.

Funds had already began to chop their bullish greenback bets. Final week’s general internet lengthy place value $10.3 billion is the smallest since September, and about half the $20 billion or so it had been from mid-December by mid-January.

As with the euro, positioning just isn’t stretched. As with the euro, there may be loads room for speculators so as to add to their longs once more and wager on it appreciating.

(The opinions expressed listed here are these of the creator, a columnist for Reuters.)

(By Jamie McGeever)



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