ECB Outcome Prompts Euro Buying BUT Outlook Still Favours Pound and US Dollar
- Written by: Sam Coventry
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The euro pound exchange rate (EUR/GBP) and euro dollar (EUR/USD) have both shot higher following the December meeting of the European Central Bank’s decision making body.
The ECB has opted to hold fire on any new measures to boost the Eurozone economy.
In the run-up to the event we saw heavy selling of the single currency as speculative traders appear to have not wanted to be caught out by any surprises. The lack of action has prompted a bout of position squaring by overly-optimistic traders.
- The euro to pound exchange rate (EUR/GBP) traded 0.60 pct higher on a day-to-day basis following the news. At the time of this article's update it is quoted at 0.7896.
- The euro to dollar exchange rate (EUR/USD) rallied half a percent. At the time of writing the rate has moved to 1.2370.
NB: The above quotes are taken from the wholesale market and your bank will affix a spread at their discretion. However, an independent FX provider will guarantee to undercut your bank’s offer, thereby delivering up to 5% more currency.
To gaurd agains currency fluctuations we recommend discussing a trading strategy whereby optimal levels are automatically executed.
More Losses Ahead
It was only yesterday that we saw the pound heading towards its best levels of 2014 once again.
While we see this target as being a possibility in coming weeks we believe any move will be gradual.
"I’m still short of this pair and happy to stay that way. Obviously, based on the reaction to the ECB overnight, the short-term market was overly short EUR at the wrong levels and got caught out by some illiquid conditions. Nevertheless the fundamental view for the EUR heading into 2015. A quick look at the EUR/GBP daily chart shows broad consolidation between .7825/.8025 and I’m still strongly of the view that this will resolve itself in an aggressive bearish break to sub 0.75 levels early next year," says Sean Lee at ForexTell.
Selling the euro dollar is meanwhile touted as being a shoo-in for the ‘trade of 2015’ by many a trader. Again though; patience will be required before the trend resumes.
The ECB - What Happened at December Meeting to Boost the EUR?
Dennis de Jong, managing director at UFX.com, comments on the ECB monetary policy statement:
“Many were hoping that Mario Draghi would hand the eurozone the biggest Christmas present possible today by introducing a programme of QE, but they’ve been left disappointed with the ECB deciding to wait longer.
“QE is looking increasingly likely in early 2015 to try to fight off the threat of deflation, especially with the bank slashing its growth and inflation forecasts. The eurozone remains in a perilous state and more urgency is now required from the ECB.”
Traders took particular note of a comment made by President Draghi that the decision to change balance sheet language is not unanimous.
This tells us that there is still a lack of unity amongst the governing council as to quantitative easing.
A more unified approach will be necessary before any major steps are taken.
The ECB’s economic staff also released their latest projections for the Eurozone economy.
The latest projections expect inflation and growth to remain subdued in the months ahead.
“The bottom line is that until Mr. Draghi puts his dovish words into action, the euro should far a bit better. A disappointing U.S. jobs report Friday could see the euro revisit $1.24 or higher,” says Joe Manimbo at Western Union.
Goldman Sachs’ Reaction
Think the press conference is not a pre-announcement, but it is as dovish nudging towards sovereign QE/more easing as realistically possible:
- expectation to intention, not YET action
- adjust SIZE and composition
- past measures based on better data, been worse since
- staff forecasts weaker, and that even before oil impact
- core inflation to come in lower, after installing core inflation as the thing to watch
- oil impact not just positive as in the past, but second order impact and risk of impacting inflation expectations and wages stressed
- Drahgi clear he hopes for consensus, but he won’t wait them if people drag their feet and no fear to do a 5:4 vote.
