Euro Avoids an ECB-Shaped Bullet and Jumps

• Pound-to-Euro exchange rate is at 1.1420
• Euro-to-Pound Sterling exchange rate is at 0.8755
• Euro-to-Dollar exchange rate is at 1.2464
• Pound-to-Dollar exchange rate is at 1.4235

Above: ECB President Mario Draghi's opinion on the value of the Euro will be a key outcome of today's meeting. (C) European Central Bank.

The Euro firmed after the ECB’s January 2018 policy meeting and Draghi’s press conference which expressed little alarm over the Euro's recent behaviour.

There has been a sizeable reaction by the Euro to the European Central Bank's January policy event with the single-currency surging across the board in response to the apparently nonchalant stance adopted by the Bank towards the currency's recent rise. 

The Dollar was a big loser of the event, but we note the British Pound has taken advantage of the Dollar's latest woes and has riden the Euro's coattails and pushed to fresh multi-month highs above 1.43.

The ECB opted to keep interest rates unchanged and the value of their money-printing programme at €30BN per month - in line with analyst expectations.

The statement released by the Bank was unchanged on the previous statement with policy-makers communicating that they will continue with their extraordinary monetary stimulus programme for as long as necesssary.

While the statement provided little action, there has been a rise in the value of the Euro in response to the tone adopted by ECB President Mario Draghi in the press conference that followed the initial statement:

Draghi stated he is not convinced that inflation is not embarking on "a sustained upward trend" and notes that the exchange rate presents a source of uncertainty for the inflation outlook. 

The exchange rate needs monitoring and an ample degree of monetary support is therefore needed to ensure inflation continues to pick up.

This was a clear word of caution regarding the Euro and something traders were wary of, yet the Euro rose in response.

EUR going higher on #Draghi comments pic.twitter.com/Q9MsvZ01Cd

— Neil Wilson (@neilwilson_etx) January 25, 2018

What does this tell us? It suggests markets might have expected more of a tongue lashing aimed at the exchange rate than what was actually delivered. "Draghi is going to have to do more than this to jawbone the Euro lower," says Richard Perry, an analyst with Hantec Markets.

"Draghi is not overtly talking the Euro down - so its going up, for now," says Jasper Lawler, analyst with London Capital Group.

A number of institutional analysts note that there is a key subtlety that traders were looking for, and this relates to the nature of the Euro's behaviour in the eyes of the ECB.

"Focus is Euro volatility generating uncertainty, but not voicing concern about the level of the Euro. For me this is what is causing investors to buy the Euro again," says Neil Jones at Mizuho Bank Ltd.

This point is confirmed by Viraj Patel at ING who says the distinction in 'volatility' and 'absolute levels' of the Euro is important.

If Draghi focuses on euro "volatility" and not euro "level" then that is not talking the currency down... it's just stating the obvious: central banks don't want large FX fluctuations $EUR #ECB

— Viraj Patel (@VPatelFX) January 25, 2018

Either way the reaction by the Euro confirms just how tricky these press conferences can be to anticipate.

“ECB president Draghi has done enough to keep Euro bulls happy and in not pushing back too much against the recent strength in the single currency. So long as the rate of appreciation remains well contained, it seems like the central bank is willing to live with euro strength as a consequence of the success of its past easing efforts," says Timothy Graf, head of macro strategy for EMEA at State Street Global Markets.

The Euro advance has been focussed largely on the under-fire Dollar which has in turn sold off further against its competitors hence the rise in EUR/USD is actually aiding the Pound higher against the Dollar.

The Pound-to-Dollar exchange rate has risen back above 1.43 in tandem with the Euro's rise, even if the Pound-to-Euro exchange rate is falling.

So a mixed bag for Sterling then.

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