Draghi was Less Dovish than Expected
The ECB announced some easing measures at their meeting yesterday, but it wasn’t enough for the markets, leading to a rally in EUR/USD.
Specifically, Draghi pushed back expectations for a rate increase and introduced TLTRO III.
The market takeaway of the meeting was summed up nicely by a discussion in the Q&A part. A reporter pointed out that several central banks have recently cut rates and the markets are pricing high probabilities for the Fed to cut rates. He asked why the ECB was not on this same path.
Draghi responded by emphasizing that economies in different jurisdictions have different environments, somewhat downplaying correlations in today’s global economy. He further argued that the Bank of England had been discussing the potential of raising rates.
Essentially, the markets were on the same wavelength as this reporter. After so many central banks shifted dovish, they expected the ECB to do the same.
What surprised me in particular was how complacent Draghi was towards the recent slump in inflation. He mostly attributed it to the decline in oil prices and took a stance that downward inflationary pressures were transitory. This is certainly not how other banks are viewing it.
Fed Chair Powell discussed earlier in the week the dangers posed by subdued inflation. He emphasized that it would only take a few tick drop in inflation to cause implications to monetary policy, if it were to happen on a sustained basis.
The ECB meeting has created somewhat of a divergence in expectations among the central banks. At least until further Euro inflation data is released or until the next ECB meeting.
I think the single currency can appreciate from here, but I see better opportunities in the cross rates. There is a range playing out in EUR/AUD and EUR/CHF, and an upside break stands to offer follow through. EUR/JPY has been hovering around critical resistance, a sustained break might be signaling a reversal.
The reason I have some reservations about playing EUR/USD to the long side is that the pair faces some important resistance. There was a big focus on the 1.1260 level this week. However, I discussed further overhead resistance, and the importance of it in prior forecasts.
Specifically, the 100-day moving average has come into play. To add confluence, the 38.2% Fibonacci retracement of this year’s decline is just above it.
It would take a break above 1.1318 to reaffirm the recent uptrend in my point of view.
EUR/USD has been held higher by the well-known horizontal level at 1.1260 in early European trading. The NFP report has not been offering a lot of volatility as of late. I expect sellers will try and defend 1.1294. On a dip, I see support at 1.1213.
- The ECB meeting stands to keep the euro firm over the near-term, I see long opportunities in some of the cross rates.
- A break above 1.1318 reasserts the uptrend.
- I see better opportunities for dollar bulls in other pairs, like USD/CHF and AUD/USD.
This article was originally posted on FX Empire
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