EUR: No help from the ECB in sight

The dollar has been reversing its previous day’s gains overnight in response to what seems like a flip in sentiment rather than a reaction to new news. If anything, US Commence Secretary Wilbur Ross warned that the US and China remain “miles and miles” apart on trade (which on its own should not lead to a soft US dollar). While the dollar is likely to struggle today, this should not be so much the case against the euro (and thus European FX) as the German IFO survey should tame euro upside.

In line with the general trend in eurozone data, we expect the German IFO survey for January to decline today, justifying the cautious and dovish message from President Mario Draghi yesterday. Lower-than-expected eurozone growth and the below target eurozone CPI suggest (a) the rising likelihood of new TLTROs being delivered by the end of 2Q19 and; (b) the falling probability of an ECB deposit rate hike in 4Q19. As per EUR & ECB: No help provided and none to be expected, this means a lack of domestic drivers for a stronger euro. We expect EUR/USD to move to 1.12 over coming months. We expect EUR/USD to rise persistently but only in response to structural US dollar weakness (rather than euro strength). But for this to happen we still need to wait a few more months. The near-term bias is still for lower EUR/USD, with the cross briefly breaking the psychological 1.1300 level overnight.

Sterling continues to strengthen and reached the highest level against the euro since 2Q17 in response to news that the DUP is shifting its support towards Prime Minister Theresa May’s deal (this follows a similar change in stance from European Research Group (ERG) Conservative MPs in prior days). Although there are still not enough votes for May’s deal to be passed in Parliament, with many MPs shifting away from the notion of 'no deal', this materially diminishes the odds of such a scenario and, in turn, supports the oversold and heavily undervalued (on a medium-term basis) sterling. These dynamics suggest more upside to GBP today.

We see downside risk to Sweden’s December retail sales today, which have fallen consistently through 2018 and could now slide below 1% year-on-year growth. This indicates slowing growth momentum, which will likely keep the Riksbank on the sidelines for much of 2019 and possibly into 2020. Contrast to Norway, where retail sales are growing 3% YoY, with Norges Bank set to hike in March (see Norges Bank Review), and probably once more in the second half of the year. Given the clear monetary policy divergence, we favour long NOK/SEK positions, targeting 1.10 by mid-2019.