As usual, euro did not react to the European Central Bank's monetary-policy decision until ECB President Mario Draghi started the press conference. The currency trended higher throughout Draghi's speech, taking out 1.35 and 1.36 levels in the process. Although many investors may wonder what Draghi said to drive the currency up nearly 1 cent, it was what he didn't say that set off the rally in the currency.
Basically Unchanged
The ECB President did not express any major concerns about the crisis in emerging markets, increased worries about inflation, monetary conditions or the economic outlook. His comments were virtually unchanged from January and given the recent pressure on the EUR/USD, the lack of increased concerns about growth or inflation disappointed the bears and drove the currency pair sharply higher.
Lets be clear, the ECB maintains a bias to ease. Without any ambiguity, Mario Draghi said they would take further decisive action if needed. He indicated that rates would remain low for an extended period of time because of the prolonged period of low inflation and downside risks to growth.
Last Month vs. Now
However the difference between this month and last month is that Draghi acknowledged the encouraging signs in the recovery, pickup in consumer demand, rise in confidence and stable savings rates. In January, he ignored all of the improvements in German data and spent most of his speech taking about low inflation.
Draghi's slightly more positive outlook on the economy single handedly drove EUR/USD above 1.36 even as he warned that the central bank needs to remain extremely cautious because the recovery is fragile and uneven.
Possible Triggers
As for the future of monetary policy, Mario Draghi reiterated that worsening inflation or unwarranted market tightening as triggers for additional monetary actions. However the recent signs of recovery reduce part of their concerns about lower inflation and money market rates have been stable. At the end of the day, the ECB is in no rush to increase stimulus and did not move closer to easing this month, which is enough for EUR/USD traders to bid up the currency. If EUR/USD holds above 1.36, the stop will be 1.37.
Kathy Lien, Managing Director of FX Strategy for BK Asset Management.