ECB Meet Could Spell End To EUR/USD Highs

The highs may be in for EUR/USD after today's ECB meeting, even though Mr. Draghi left much unsaid. Firmer conviction for a call that the highs are in would come with a close below 1.3300.

ECB Bottom Line
It was a fairly dovish performance from Draghi, but far more for what was said between the lines than for what was said directly. Yes, the general statement saw president Draghi suggesting that inflation rates would likely fall below the 2 % target eventually and that there are downside risks in the economy, though things seemed to be stabilizing at a low level. Among the risks, the exchange rate was mentioned, and the mere mention of it as a factor saw the Euro rushing lower against the USD, JPY and GBP.

The Currency Wars
Interestingly, though, Draghi did mention the exchange rate, other remarks made it clear that he had absolutely no desire to engage in the de facto currency wars that are developing with Japan’s latest move. In fact, when directly questioned on that account, Mr. Draghi said that the various moves in exchange rates around the world are a side effect of monetary and other policies, not a result of direct intent to weaken the currency. Yeah, right…. He also avoided a direct question about recent complaints by Hollande on the exchange rate.

In general, Mr. Draghi was evasive, particularly on the matter of the “agreement in principle” announced today between the Irish government and central bank on a deal for the former Anglo Irish Bank, which is looking to move the debt up to the sovereign level versus the special “promissory note” deal that offered less favorable terms than other bank deals struck later. Anything moving up to the sovereign level suggests that the ECB backstop grows ever larger. As well, Euro had simply over-reached in recent days a Spain/Italy spreads headed wider and we have the uncertainty of the approaching Italian election later this month.

Fed Said What?
Then, on the sidelines as Mr. Draghi was speaking, we had one of the Fed’s pre-eminent doves, Charles Evans of Chicago, make the amazing comment that the Fed’s QE program could actually end once the unemployment rate works down into the low seven-percent range. Do our eyes deceive us? This will bear further watching.

It’s too early to call an end to the EUR/USD rally, but this ECB meeting ups the likelihood that the highs are in for the pair. I would still like to see 1.3300 completely taken out on a daily close for more convincing evidence. Firmness in the bond market is also a must, as the EURJPY cross has been a key contributor to Euro strength. There is endless room for EUR/JPY to consolidate here in the near term -- 500 to 600 pips to start if world government bond yields push firmly back lower into the old range.
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The 1.3400 area was important on the way up, and a break would help weaken the trend, but a close below 1.3300 would offer further destructive potential, followed by the next flatline level at 1.3170 and the rising trendline. Stay tuned.