The focus for risk isn’t the U.S. dollar (USD/JPY) (though JPY grabs the headlines) but euro/J...
Top 5 Takeaways from Thursday's ECB Draghi
11/07/2014 9:00 am EST
Even though the European Central Bank failed to introduce any new measures at Thursday’s meeting, currency analyst Kathy Lien of BKForex.com, details her five top takeaways, including what impact on the euro to expect from the risk of additional easing from the ECB.
Here are our Top Five Takeaways from Thursday’s ECB Meeting.
- Draghi Maintains Control of the ECB
- No New Measures but ECB Ready to Add Stimulus If Needed
- Main Message is ECB Assets to Expand as Others Contract
- Draghi Sees Reasons for Lower Staff Forecasts Next Month
- Two Contingencies for Further Action: Worsening Inflation and Signs that Current Action Not Enough.
While the European Central Bank failed to introduce any new measures Thursday morning, the euro dropped to a fresh two-year low against the US dollar on signs that Mario Draghi maintains control of the central bank. Going into the rate decision, investors were worried that regional policymakers would challenge Draghi’s authority, making it more difficult for the head of the central bank to rally support behind Quantitative Easing. However, Draghi made it clear that ECB officials are unanimous on their willingness to increase stimulus if needed, which signals that the central bank won’t hesitate to add stimulus using unconventional measures including QE. Before that happens though, we expect the central bank to resort to other measures, such as expanding asset purchases to corporate bonds or adding new incentives for the longer-term refinancing operations (TLTRO) program. Further action hinges on two contingencies: a decision that current action is not enough and worsening inflation expectations.
With the central bank scheduled to release its latest staff forecasts next month, the chance of a move by the ECB Thursday was slim. The second TLTRO program is also scheduled for December 11, so policymakers wanted to wait to see how banks absorb the results before taking additional action. Yet, Mario Draghi’s comment that there are indications for downward revisions to the staff forecasts puts the ECB firmly in easing mode.
The primary trade in FX is policy divergence and in Draghi’s own words, the “main message” Thursday is that “ECB assets will expand as others contract.” As long as there is a risk of additional easing from the ECB, the euro will remain under pressure. However, with speculators holding the largest amount of short positions since July 2012, now that the ECB meeting has passed, EUR/USD is vulnerable to a short squeeze up to 1.26. We view any rallies in EUR/USD as an opportunity to sell at higher levels for an eventual move down to 1.2250.
By Kathy Lien, Co-Founder, BKForex.com
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