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Why For Euro Bulls The Pain Is Only Just Starting

Judging by the 200 pip tumble since the ECB's meeting on Thursday, the EURUSD was at 1.1614 moments ago, the unexpectedly dovish taper clearly surprised many, and attention has fallen on the open-ended nature of the operation as the focus of that surprise. And speaking of said "open-ended" taper, overnight Boersen-Zeitung reported that Bundesbank President Jens Weidmann, Executive Board member Sabine Lautenschlaeger and Dutch central bank Governor Klaas Knot all opposed Draghi's decision. even as other policy makers were critical, if not opposed, including Benoit Coeure. Of course, in the end whatever Draghi wants, Draghi gets and the result if a slap in the face for all Euro bulls.

However, if Bloomberg's macro commentator and resident contrarian, Marc Cudmore, is correct, the Euro's descent has only just begun and the pain for said bulls is only just starting, because as he writes in his overnight Macro View note "Structural long-term arguments for being bullish EUR/USD, while entirely logical, are largely irrelevant right now. Investors are enthusiastically adopting the concept of a correction in the pair and won’t be easily dissuaded" especially since it now appears that no matter who the next Fed chair is, more rate hikes are coming, and a greater interest rate spread differential between the US and Europe is just a matter of time.  And then there is the threat of if not tax reform, then tax cuts, and while "the ultimate economic impact of any watered-down agreement may be minimal, but that’s a trading theme for another month. The positive sentiment of domestic policy potentially getting passed under the Trump administration is what markets care about now."

Oh, and there is the whole Catalan thing, which traders are finally paying attention to.

That, and other reasons, is why when looking at the chart below, the 200 pip move in the past 24 hours may be just the start of a broad correction that takes the EURUSD back to 1.10 if not lower.

Which brings up another fun question: how long until calls for parity re-emerge yet again...

Here is Bloomberg's Mark Cudmore's full Macro View note, explaining why "Bearish EUR/USD Narrative Will Dominate for Weeks"

Structural long-term arguments for being bullish EUR/USD, while entirely logical, are largely irrelevant right now. Investors are enthusiastically adopting the concept of a correction in the pair and won’t be easily dissuaded.

 

The dollar suddenly has several things going for it while traders have belatedly agreed the ECB is dovish and Catalonia might be a problem.

 

Narratives often dominate fundamentals for weeks at a time. Often, old data will be looked at in a new, supportive light when the story shifts, while fresh, contradictory information is dismissed.

 

Same as for many other inputs in financial markets, it’s the second derivative of the narrative flow that matters, not the underlying direction.

 

Whoever the Fed chair is, a December rate hike seems inevitable. Depending on Trump’s nominee, long-end yields may drop sharply, but front-end rates won’t. Even the dovish candidates -- Jerome Powell or Janet Yellen -- are part of the committee that’s laid out guidance for four rate hikes between now and the end of 2018.

 

Tax reform may never arrive, but tax cuts probably will. In the context of next year’s mid-term elections, it’s hard for U.S. politicians to aggressively fight for budget neutrality over putting money in their constituents’ pockets.

 

The ultimate economic impact of any watered-down agreement may be minimal, but that’s a trading theme for another month. The positive sentiment of domestic policy potentially getting passed under the Trump administration is what markets care about now.

 

The ECB was always going to keep its options open and try to sound as dovish as possible. They delivered exactly as anticipated on Thursday but investors have only just decided to recognize this message.

 

The Catalonia crisis has looked the same for a month now. With both sides maintaining a strong stance, the threat of a catastrophic misstep always loomed large. Traders are now acknowledging that tail risk.

 

Sometime in the future, current- account balances, growth momentum and currency valuations may return to support EUR/USD but its prospects look bleak for the weeks ahead.