Credit Agricole on the euro
The EUR has been in demand for most of the last few weeks, irrespective of firm expectations of the ECB acting anew in March. If anything most of the currency's upside can be related to position squaring related upside on the back of increased risk aversion.
This is especially true as speculative EUR short positioning remained elevated. However, as of now positioning has reached more neutral territory and that may suggest that monetary policy expectations will become a more important currency driver anew. When it comes to the ECB, it must be noted that inflation expectations as measured by 5Y inflation swaps fell to multi-year lows, irrespective of Draghi making a bigger case of additional policy action in March.
We believe that levels above 1.13-1.14 will ultimately prove unsustainable, as increased downside risks to inflation should increase the risk of the ECB surprising on the dovish side, indeed in contrast with December last year.
