EUR peaked above 1.08 ahead of ECB policy decision - Scotiabank

The ECB policy decision this morning is less about the expected 25bps cut--it's fully priced in--than how the policy outlook is communicated, Scotiabank's Chief FX Strategist Shaun Osborne notes. 

Market focus is on the rate outlook

"The significant boost to fiscal policy from the German government this week and the likelihood of generally looser fiscal policy across the Eurozone as Europe arms up has put a big question mark over how much further rates are likely to fall in the coming months. Policymakers were already starting to hint that rates were approaching neutral. Significantly looser fiscal policy may see policy err on the side of more restrictive, if only slightly so, in the coming months." 

"Note that swaps anticipate a little less easing from the ECB over the balance of the year, with the policy rate expected to base around 2.00%. Note that narrower EZ/US spreads continue to suggest spot is still quite significantly undervalued, despite this week's surge. Our fair value estimate sits at 1.0962 today." 

"The EUR's powerful rally may be stalling around the 1.08 point--1.0804 represents the 61.8% Fibonacci retracement of the 1.12/1.01 decline seen in the past few months. Intraday trading patterns strongly suggest a short-term peak at least. But corrective losses may only extend to the low 1.07 area--support is 1.0720/25--given the bullish position of short- and medium-term trend oscillators. Above 1.0805, spot gains should extend to 1.0970/75."