Dovish Draghi Comments Drive Down EUR/USD

08/08/2014 9:00 am EST

Focus: CURRENCIES

In this article, James Hyerczyk at FXEmpire.com discusses the recent geopolitical events and their impact on world economies and currency pairs.

On Thursday, the EUR/USD broke to nearly a nine-month low after European Central Bank President Mario Draghi indicated the central bank’s monetary policy would diverge from the US for an extended period of time.

After the ECB left interest rates at historically low levels, Draghi said the risks to the economic recovery in the Eurozone are increasing from the conflict in Ukraine and that the recent economic data has been disappointing. “Heightened geopolitical risks, as well as developments in emerging-market economies and global financial markets, may have the potential to affect economic conditions negatively,” he said during his press conference after the ECB meeting. He further added that, “We are strongly determined to safeguard the firm anchoring of inflation expectations over the medium- to long-term.”

The EUR/USD broke on the Draghi comments because of the dovish tone. In the meantime, the US Federal Reserve appears to be closer to raising interest rates sometime in mid-2015.

The GBP/USD was trading flat but very close to an eight week low after Bank of England policymakers maintained their benchmark interest rate at a record-low 0.5% following a two-day meeting. In addition, BoE members also kept their asset-purchase target at 375 billion pounds.

UK 10-year government bond yields declined to their lowest levels in almost a year, making the British pound a less-than-desirable investment versus the US dollar.

Also helping to pressure the British pound and euro against the US dollar was a report showing a greater-than-expected drop in US unemployment claims.

The stronger dollar and supply concerns helped keep downside pressure on September Crude Oil. Sellers continued to control the market despite Wednesday’s Energy Information Administration weekly supply and demand data which showed lower than expected stockpiles.

Traders continued to ignore geopolitical events because they don’t have a direct effect on supply. Without the immediate threat of supply disruptions, both speculators and money managers are moving out of crude oil.

Gasoline inventory had a drawdown last week which may stop the slight in its market. Gasoline prices may actually rise if refineries decide to shut down for maintenance sooner than expected. This could mean a drop in crude oil demand which should further erode support.

December gold prices were flat on Thursday after Wednesday’s surge. Prices remain near the July 29 top at $1314.60 on speculative buying and short-covering. The market spiked higher on Wednesday after the news hit the market that Russia was amassing troops along the Ukraine border. As long as they remain there, gold may be underpinned. Any escalation in military activity in Ukraine is likely to trigger another rally in gold prices. For the most part, the activity in Ukraine is giving gold direction. Traders aren’t too concerned about a strengthening US dollar.

By James Hyerczyk, Analyst, FXEmpire.com

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