The full extent of the impact of ECB President Draghi’s post meeting speech has been revealed by the price action of the markets. If there is one lesson to be learnt for future central bankers, it is this… don’t perform an action and hint immediately that it will be the last time that you do so. That’s like not performing the action in the first place! If I seem clear as mud, let me elaborate. The ECB cut rates further into negative territory last week, but in the post monetary policy meeting announcement, Mr Draghi hinted that the ECB was unlikely to make further cuts. In an instant, what should have been remembered as a dovish policy meeting took on a hawkish tone. EUR/USD is still trading above pre-meeting levels, surely this must be counter to the aims of the ECB. I can imagine some northern Eurozone board members frowning at the quantitative easing, shaking their heads at the negative rates, but a lower euro? There would only have been smirks there surely? Not now!
One thing is certainly different in this post-meeting world, and that’s the equity markets. They are unquestionably higher and look to have taken out key technical levels. Further highs look inevitable and possibly a re-test of 2015 levels. The bottom line is that we are back in a risk positive, or if you like.. ‘risk on’ environment. What we don’t yet know is whether the markets can tolerate another slump in oil prices. While technicians I respect are bullish commodities, I remain sceptical of the ability of oil to sustain the current rally. Should the black gold turn again, can the broader market ignore it? Presumably one of the concerns in the recent bout of market turbulence has been fears of some systemic risks brought on by failing loans in the Shale industry in the United States.
If the dollar rally is to continue, this is roughly where I would expect the turn to begin. I remain more comfortable regarding the bearish case for GBP/USD than EUR/USD from looking at the charts. Thematically the case for a continuation in the rally of emerging market currencies looks strong, and I suspect that this will be linked to the sustainability of the equity market rally. Of course there will country specific narratives that might negate the general positive tone. In the case of the naira, the Nigerian currency appears to have stabilised, although as I warned at the start of the year, at a level comfortably above 300. This appears to be the new normal now.
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