EUR/USD passes without much of a glitch after yesterday’s ECB conference. While Gov. Draghi expressed some concern over inflation in general, he went on to explain why the euro should fall against the dollar. This is exactly what we have been commenting on over the past month!!! I guess even Gov. Draghi reads our BLOG!!
Draghi said that the fundamentals regarding the EUR have changed and detailed:
- Monetary policy divergence means the US will tighten way before the ECB will. He already hinted in the past that rates will not rise before end 2016.
- June’s ECB measures (negative deposit) have been successful. Basically, banks are “punished” for depositing money with the central bank.
- Speculation has changed: increased EUR FX shorts. Draghi quoted known data.
- Flows into the euro zone have weakened: less short term capital in-flows. Money entered the zone chasing high yielding peripheral bonds. These bonds are not so cheap anymore.
Gov. Draghi expressed their concerns over the high unemployment rates that continue to plague countries like Spain and Italy. EUR/USD traded around 1.3370, in a relatively limited range around the press conference. Draghi commented that inflation will eventually return inside the range and the lack of worries about weak growth, resulted in the EUR climbing higher to 1.3390. Support for the EUR stands at 1.3325, with critical support at 1.3295 – the November low. We do not feel the slight move higher has dampened our overall expectation that the EUR will eventually break through support levels en-route to the 1.20 handle!!
As expected, the Bank of England held rates firm at 0.5% and did not release a statement from their August meeting. GBP/USD gave up gains trading as low as 1.6802 forcing EUR/GBP higher to 0.7965 presently. The market was disappointed with the lack of colour from BOE Gov. Carney and decided it was time to take profit. This is somewhat disappointing given what we thought was the start of a rally in the GBP (vis-a-vis) the USD. It will be interesting to see what comes next and if traders stop the rot and start to buy the GBP back.
Finally, geopolitical events in Ukraine persist as Pres. Putin took a bold step yesterday slapping import bans on an array of food goods from the U.S. and Europe. The restrictions include all cheese, beef, vegetables and other dairy products as Pres. Putin looks to strike back at sanctions over the conflict in Ukraine. This on-going war poses a serious threat to any European recovery and yesterday’s actions by Pres. Putin should cause great concern for European leaders. As I noted yesterday, this is a pointless move and will in all probability hut Russia more than it hurts the West. These games remind me of when I was back in school and the silly antics us kids all got up to. It is totally unnecessary and in effect what they are trying to do is DEFLECT THE SPOTLIGHT away from the downing of flight MH17. I was always taught that what makes a real man is when you can stand and take responsibility and apologise for your actions. Unfortunately this will not and does not work in politics and therefore this problem is simply not going to go away.
My best advice in times like this is stay out until the dust settles, but if you want to get involved be strict with your stops!! Greed is sometimes good, but it can also come back and bite you on the…Have a good weekend!!!!
Take care and good luck