EUR/USD: Trading A Corrective Top - Morgan Stanley
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The ECB will be in focus when it meets on Thursday, notes Morgan Stanley.
"With negative rate criticism becoming widespread, reaching from the G20 towards a weekend report by the BIS suggesting that long-term costs of negative rates exceed short-term benefits, markets are becoming increasingly sceptical about this instrument. The BIS makes the valid point suggesting that negative rates could lead to behavioural changes, citing Switzerland as an example where the move to wards negative rates made mortgage yields move higher," MS adds.
"Hence, the ECB may not deliver on the rates front more than what is currently priced in.
Instead, it may consider other innovative tools aim at pushing more money into the system. Different to December when easing expectations grew ahead of the ECB meeting, markets have become more realistic, suggesting the ECB delivering beyond expectations could put the EUR under renewed selling pressure," MS argues.
"On Friday, EURUSD tested its 200DMA, coming in at 1.1045, but failure to develop a daily closing price above 1.10 today suggests to us thata corrective high has been traded, opening renewed downside potential," MS projects.
In line with this view, MS maintains a short EUR/USD position from 1.1360, with a target at 1.07, and a revised profit-stop at 1.1070.
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