Forex Flash: Market Skittish ahead of ECB – BBH

Brown Brothers Harriman analysts feel that the market is becoming a little skittish ahead of tomorrow’s ECB meeting and there may also be some apprehension ahead of the Spanish bond auction – the first since the LTRO pay down.

They note that while the euro’s recovery off the $1.3460 low yesterday was impressive, follow-through buying has not materialized. Firstly, they see that the spread between US and German short-term rates has stabilized and correcting the sharp move against the US. They see that this spread has been doing a good job of tracking the EUR/USD exchange rate. They feel that many are wary of comments by Draghi that could either dangle the possibility of a rate cut or in other ways signal displeasure at tightening of financial conditions in the Euro area. They write, “Recall that in December, there were many on the ECB that wanted to cut rates, but in January apparently no one did. German factory orders were mixed in December, slightly stronger than expected in m/m terms (0.8%) but weaker than expected in y/y terms (-1.8% y/y).”