Why has the euro jumped on old news?
ECB PREVIEW: China's Dragon Spits Fire on ECB Targets The gods must all be against Mario Draghi and his knights in their anti-deflation war-march in the euro zone. Not only was December's monetary arsenal extension largely ignored by markets, but now the energy market waters have become even more turbulent and China's Dragon has awoken, spitting sulfur and fire on Draghi's efforts.
The majority of economists and market participants now think the European Central Bank (ECB) is set to prolong or/and extend its asset purchasing in tandem with another deposit rate cut, a move seen at the beginning of December last year.
As evidenced by the foreign exchange markets, Draghi waited too long with a quantitative easing extension that should have originally been announced in Malta last October. Moreover, once delivered, the markets took an immediate opposite reaction to that expected by the ECB, sending the bank a signal that its action was just too little, too late.
Instead of selling euros, traders bought euros in droves, pushing its exchange rate against the US dollar 3.06% higher within a single day, making it the second-largest single day appreciation in the currency's 17 year history.
On top of that, oil prices have dived to fresh 12-years lows and China has, once again, made it into the spotlight with its almost 20% equity market fall, pushing world equity markets deeply into negative.
Now it really looks like whatever the ECB is doing, it always gets it wrong.
Targeting inflation of 2% and forecasting low oil prices and low aggregate demand at the same time leaves the ECB with very little gunpowder at their disposal.
"As the euro zone currently seems to be in the calm eye of the current storm, and Draghi already had problems uniting the ECB for the December decision, we believe the ECB will keep dry the little powder it has left– at least for this week," Carsten Brzeski from ING wrote in a note before the ECB meeting.
No matter how much government or municipal bonds you buy, with oil prices below $30 a barrel, there is nothing to be done, except keep persuading journalists and market players that should things get even worse, you stand ready to act.
EUR/USD: Euro Consolidates as Draghis Hints at March Adjustment Digested The EUR/USD pair crashed and was temporary trading at daily lows around $1.0800, down 0.8% on the day when the European Central Bank (ECB) press conference started.
The pair managed to recover slightly, turning back over $1.0800, erasing most of its previous losses, trading around $1.0870.
The euro dropped sharply as ECB President Mario Draghi mentioned that the monetary policy stance is likely to be reviewed in March, meaning further measures might be on the way then. Moreover, he confirmed the very low inflation in the euro zone, which is being dampened by failing oil prices.
Furthermore, Draghi saw increased risk of the future growth, taking into account of the anxiety in emerging markets. On the upside, the domestic demand might see a certain benefit from the current monetary policy in months ahead.
Shortly before, the ECB made no changes to monetary policy, keeping the deposit rate at -0.3% and the main refinancing rate at 0.05%.
The euro was not very volatile after the decision, as expected, and the EUR/USD pair was spotted directionless around $1.09.
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Euro pops because headlines say the ECB may not ease again
Why is this news?
Draghi has already said that they felt that the minimal action they took in December was because they felt there was life in the Eurozone economy and there was no need to do more, right then
There were also "many members" who were sceptical about further easing then. I doubt they've changed their minds over Christmas
What we've just seen is another reason to think that we could be close to a bottom in the euro or at least that the tide is turning further. Europe isn't out of the woods yet but the ECB is moving into 'wait and see mode' and the economy is showing some signs of life
I'm now out of the EURGBP shorts that I've held for 18 months because one of the big risks to the trade was a turnaround in the Eurozone and/or sentiment. Much like my cable longs I exited in Dec, I don't want to see 18 months of long awaited profit evaporate. 0.7500 was always my reflection point and the second break through 0.7550 is my line in the sand gone
All through last year I said that after the Fed hikes the dollar would suffer and that one beneficiaries would be the euro. For all the distance it's fallen it always looks it could rip if given an inch. However, the longer term direction is very much still in the balance, and right now I'm not looking for reasons it might rip, but for reasons why it might not go down anymore. While the pop today is only a measly 70 pips, hardly enough to scare long held shorts, it's the reaction itself that's more important as it shows a willingness to buy quickly on such news, and that gives me a tiny insight into how the market feels
While I'm watching for those signs, I can't ignore what the price is doing and even though I still feel that the policy divergence between the UK and EU is a good trade, the strength of the price moving against my position tells me that it's time to take the money off the table and look to play the strategy another time
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