Mario Draghi caused a rise in the Euro, European banking shares and bond yields yesterday after signalling a turning point in the economic fortunes of the single currency. His press conference after the ECB left interest rates on hold and refused to signal any future increase from the historic lows of 0%.
Draghi also staged a counterattack against the White House after President Trump’s trade adviser Peter Navarro said Germany was using a “grossly undervalued” Euro to “exploit” the US and EU.
“I do not think there is any merit in attacking Germany,” Draghi said. “The exchange rate of the euro is determined by market forces, if we look where the exchange rate stands today with respect to historical averages, we do not see the Euro off the historical average but the dollar is off the historical average. It means the euro is not the culprit for this situation.” Fighting talk from the ECB chief!
Mr Draghi also reeled off a series of positive indicators from inflation to GDP growth, but what swung the mood was the removal of one sentence from his usual opening remarks at the press conference in Frankfurt. “There was a sentence that has been removed from my introductory statement that used to say ‘if warranted to achieve its objective, the governing council will act using all the instruments available within its mandate’,” he said.
“That’s been removed to signal that there is no longer that sense of urgency in taking further actions, that was prompted by the risks of deflation.” Draghi added that there had been no discussion about the need for a further ultra-cheap targeted long-term refinancing operation, essentially an offer to pay banks to lend to firms. The lack of official action was taken as a clear sign that a corner has been turned in the ECB’s approach, showing that normality was returning after the long fightback and the prolonged financial crisis that gave rise to fears for the future of the Euro. Instead the world’s No. 2 reserve currency was on a firm footing, Mr Draghi said, unemployment was falling and interest rates were unlikely to be cut further. “Our monetary policy has been successful,” Mr Draghi noted.
In US trading hours, the market mood was cautious as participants awaited the release today of the February Non-farm Payrolls employment report – which could heighten expectations that the Federal Reserve will raise interest rates by 25bp on Wednesday. Positive Payrolls and Average Earnings numbers at 13:30 today will add fuel to Janet Yellen’s fire and bring the chance of a rate hike next week closer to 100%, and the chance of a further hike in April or May more likely than not.
The pound continued its relatively range bound week by hovering near seven-week lows, as traders reflected on the governments budget statement and remain concerned by the potential economic fallout of Brexit and the timetable around triggering Article 50, before the House of Commons vote on the Brexit bill next week. There has been continued calls from unnamed Tory MPs that the Prime Minister should call a snap election. These have been firmly rebuffed by 10 Downing Street as Theresa May continues her stance that “Brexit means Brexit” and that her timetable of triggering Article 50 and beginning the negotiations with the EU remain her sole focus.
EUR/USD is a touch higher ahead of the European open but failed to sustain an earlier break above $1.06 where we saw today’s high at $1.0603, short of yesterday’s peak at $1.0615. The Euro remains supported by yesterday’s ECB announcement where President Mario Draghi adopted a slightly more hawkish tone than many had expected. The Dollar meanwhile is relatively stable versus yesterday’s close as investors await the US payrolls report later today. From a technical view, yesterday’s high at $1.0615 may offer some resistance ahead of Monday’s high at $1.0640. On the downside, the overnight low at $1.0573 and yesterday’s low at $1.0525 are in focus.
GBP/USD is flat ahead of the European open having fallen to a fresh seven-week low yesterday at $1.2135. Sterling remains on the defensive as investors countdown to the triggering of Article 50 with recent media reports suggesting it could happen as early as Tuesday; UK industrial and manufacturing production figures due at 09:30 GMT may also prompt some reaction. The Dollar meanwhile is relatively stable versus yesterday’s close as investors await the US payrolls report later today. Yesterday’s low at $1.2151 forms our first support level ahead of the January 17th low. On the upside, we watch for yesterday’s high at $1.2195 and Wednesday’s high at $1.2214
USD/JPY rallied to a fresh seven-week high of ¥115.46 overnight as US government bond yields extended to new multi-week highs. Japanese macro data also fell short of expectations and will have only helped support the pair – BSI Large Manufacturing fell to +1.1 from +7.5. Looking ahead, the US payrolls report due at 13:30 GMT will be the main focus for investors although economists have argued they cannot see March rate hike bets being altered after today’s figure. From a technical view, the earlier high at ¥115.46 may offer some resistance ahead of the January 19th high at ¥115.62. On the downside, the February 15th high at ¥114.96 and Wednesday’s intraday low at ¥114.27 are in focus.
GBP/EUR slipped to a fresh seven-week low overnight of €1.1467. Sterling remains on the defensive as investors countdown to the triggering of Article 50 with recent media report suggesting it could happen as early as Tuesday; UK industrial and manufacturing production figures due at 09:30 GMT may prompt some reaction. The Euro meanwhile, remains supported by yesterday’s ECB announcement where President Mario Draghi adopted a slightly more hawkish tone than many had expected. Beyond today’s low, we look for support at the January 16th high of €1.1426 followed by the January 17th low at €1.1340. On the upside, the overnight high at €1.1504 and Thursday’s high at €1.1553 are in focus.