Day four: our EUR/USD trade

EUR/USD once again found strong support below 1.3650, with the pair looking like it could head up to my potential sell limit. 

Interestingly the pair bounced off the 200-day moving average, which it’s been trading above since September 2013.

While most of the attention in Europe centred on further strong data out of the UK, we also saw interesting comments from Bundesbank president Jens Weidmann who suggested that negative deposit rates may revive lending in the interbank market. He did temper these comments by saying he is not sure whether the ECB has to act as there are no signs of deflation in the eurozone.

A Reuter’s survey (released overnight) highlighted that the consensus now sees the ECB cutting both the refinance rate and the deposit rate at the June 5 meeting. Price action around the EUR now centres on whether traders feel there is a genuine chance of negative deposit rates being imposed and if so to what extent will they be cut to, and potentially for how long?

Naturally if the ECB doesn’t live up to the markets’ expectations then we could see a sharp EUR rally and this would be a concern for me if I was short at current levels. Understanding what is priced in, in terms of central bank action is key; it’s for this reason why currencies don’t react when we actually see a rate cut from a central bank.

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