After yesterday’s turbulent day, the FX markets were relatively quiet overnight. The overnight range was only 40 points in EUR as traders weighed the dovish comments from ECB President Draghi’s press conference.
Many traders are not yet convinced this is a change in direction for the EUR and there are some who consider this move an excellent buying opportunity.
While the ECB stated yesterday that the Euro economy was weak, they did say that recovery was expected later in 2013, with growth coming from a strengthening of global demand. What has become evident over the last couple of ECB meetings is that the most powerful weapon the ECB President seems to possess is his own voice. Just as he helped strengthen the EUR back in January with his words, yesterday he caused the EUR to have it largest drop in seven months, simply by suggesting the latest move higher by the EUR could hurt the economy. That type of verbal intervention is quite impressive.
Now traders are left to wonder if the ECB will follow the rest of the world’s major central banks and use an easing of monetary policy to affect the exchange rate. Verbal intervention only works for so long, before actions are needed to back it up.
After bottoming overnight at the 1.3380 level, the EUR has climbed back above 1.3400 as the European Council is meeting today and is expected to approve the 2014-2020 EU budget. Technically, the resistance at 1.3450 and 1.3480 is expected to hold today, while a break of support at 1.3380 would test 1.3340 and target 1.3300 overall.
In other currencies overnight, the AUD remained under some pressure as the RBA released its quarterly report stating that mining investment was expected to peak, while the unemployment rate could edge higher. The report also said growth for this year would be “below trend” at around 2.5%. After leaving rates unchanged this week, the central bank is now expected to lower rates sooner rather then later, possibly at their next meeting.
USD/JPY moved lower overnight as the JPY was supported by sellers of EUR/JPY and technical resistance at the 93.70 area. Also aiding the JPY was a news report that PM Abe may not succeed in naming a BOJ governor that would be as radical in terms of policy as he had hoped. Members of his cabinet apparently are concerned that a too “yen-negative” candidate may affect the JGB market. No one is sure when Abe will announce his choice. Once that occurs, the candidate must be formally accepted by chambers of the Diet before he can be formally accepted.
Expect a relatively quiet Friday, where liquidity concerns may affect the market as the North American trading day moves from the morning to the afternoon. A major winter snow storm is expected to hit the New York metropolitan area beginning around mid-day and most traders will take the precautionary road and leave earlier than normal.
Further reading: Pound caught in a central bank sandwich
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