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3 Reasons Euro See-Sawed On ECB

Published 04/27/2017, 04:22 PM
Updated 07/09/2023, 06:31 AM

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

It was no surprise that the European Central Bank left interest rates unchanged on Thursday. Investors were focused on ECB President Draghi’s monetary policy bias and by taking a look at the price action, it should be clear that he was not hawkish enough. However, there was quite a bit of volatility in the euro after the monetary policy announcement and not all of it had to do with the rate decision. Going into the policy decision, some investors were looking for the ECB to hint at a June or later move but we felt that the chance was low given the recent strength of the currency and the central bank’s concerns about low inflation. With that in mind, Draghi started his testimony acknowledging all of the improvements in the economy. He said incoming data confirm the strengthening recovery and the downside risks have further diminished. These comments sent EUR/USD soaring above 1.0930. However, the euro gave up its gains quickly as (#1) Draghi emphasized the need to keep monetary policy extremely accommodative. He noted that while some members believed that their assessment didn’t need to change, others had a more sanguine view of the situation. Draghi also said the drop in March inflation was larger than anticipated and there is no need to discuss the sequence of exit now. In other words, the central bank is not actively considering changing its forward guidance in June and that view drove EUR/USD down to 1.0850. Yet by the end of the day, the euro was trading right back at its pre-ECB levels after (#2) the latest polls showed 60% of the people surveyed favor Macron over Le Pen. The U.S. dollar also dropped on (#3) the back of an exceptionally strong 2-year bond auction that had a bid to cover ratio (the measure of demand) at its highest level since November 2012. We still think the euro should be trading lower after Thursday’s ECB meeting but its greatest losses should be against other currencies over the U.S. dollar.

Although the greenback traded as high as 111.60, it struggled to rally for most of the U.S. session as the latest economic reports continued to disappoint. The country’s trade balance widened in March, durable goods rose about 50% less than anticipated, jobless claims increased and pending home sales turned negative. U.S. rates tumbled as Congress backpedaled on a Friday healthcare vote as the market watches to see how the government shutdown deadline will be resolved – with a real agreement or another stop-gap measure. The U.S.’ first-quarter GDP report is scheduled for release Friday along with Chicago PMI. Given the sharp drop in consumer spending and a lower retail sales report, growth is expected to have slowed significantly in the first 3 months of the year. After the false excitement created by President Trump’s tax reform plan we believe that USD/JPY has peaked until next week’s FOMC meeting. The Bank of Japan left monetary policy unchanged Wednesday night but it upgraded its economic assessment and lowered it inflation forecast.

Thursday's best-performing currency was the British pound, which soared to a 6-month high against the U.S. dollar. The move was mostly technical but sterling also benefitted from anti-dollar, anti-euro flows. The lack of market-moving U.K. data has been extremely beneficial for the pound but that changes Friday with the country’s first-quarter GDP report. Like the U.S., U.K. growth could be hampered by weaker spending and trade activity. 1.29 is still resistance for GBP/USD but the key level is 1.30. Support is at 1.2750.

Of all the major currencies, USD/CAD experienced the greatest intraday volatility. USD/CAD soared within 5 pips of its one-year high during the Asian trading session, tanked when President Trump backpedaled on his threat to leave NAFTA and then resumed its rise as oil prices fell during the North American trading session. Hours after reports that the U.S. could sign an order to leave NAFTA in the next few days, President Trump said he had a “pleasant and productive” phone call with Mexican President Enrique Pena Nieto and Canadian Prime Minister Justin Trudeau that lead him to say that the U.S. will be seeking to renegotiate NAFTA in a way that would “make all 3 countries stronger and better.” While Trump’s administration may not approach renegotiation differently than an exit, investors were relieved that the U.S. would not be immediately pulling out of one of the most important economic agreements for Canada and Mexico. Nonetheless, between the lumber tariff and NAFTA renegotiation, Canada faces many threats from its Southern neighbor. February GDP numbers are scheduled for release Friday and growth is expected to have slowed with softer spending and a trade surplus that turned into deficit last month – so it's too early to call a top in USD/CAD. The Australian and New Zealand dollars also moved lower versus the greenback despite higher import and export prices in Australia.

Latest comments

The EUR/USD might have a hard time breaching 1.11, even in the event of a favorable win by Machon. Any feedback please???
Dollar unsteady!
Good
Hello Kathy. Thanks again for sharing your analysis, you are a sharp women. Greetings from Denmark.
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