Draghi Sends EUR/USD Up: ECB Decision Unanimous, Financial Markets

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After the ECB left rates unchanged once again, president Mario Draghi meets the press and after an initial negative outlook for near term growth, Draghi said the decision was unanimous, the improvement in financial markets (repaired fragmentation) and this sends EUR/USD to break higher and to the next resistance line.

Follow a live blog of the event.

Update: Forex Analysis: EUR/USD Rebounds Off Key Support Confluence

Highlights

  • Recession likely to extend into 2013, but situation to improve later in the year.
  • Decision was unanimous and no request for a rate cut.
  • List of improvements in financial markets, not reaching the real economy yet.
  • EUR/USD Leaps.
  • Tail risk have been removed.
  • Exchange rate of euro at long term average.
  • Cannot return to previous policies because of short term contraction

Live Blog

13:15 GMT All times are GMT, press conference begins at 13:00.

13:15 EUR/USD trading at 1.3115, higher after the rate announcement. You can watch the press conference here.

13:16 The US will release weekly jobless claims at the same time, 13:00. A drop to 361K is expected.

13:21 Resistance appears at 1.3130, support at 1.31. The bigger lines are 1.30 and 1.33.

13:22 EUR/USD occasionally drops when Draghi begins talking, only to recover later. Will this happen again?

13:26 The direction of the euro depends on the tone of Draghi’s words: optimism about the debt crisis or pessimism about growth.

13:29 US jobless claims 371K, a bit higher than expected, but last month’s figure was slightly revised to the downside.

13:30 Press conference begins

13:30 Draghi begins by saying that inflation has declined as anticipated and are expected to fall in 2013.

13:31 Inflation expectations remain fairly anchored. Economic weakness expected to extend to 2013, EUR/USD slides.

13:32 Later on, the economy is expected to recover, thanks to global demand (among other things).

13:32 Governments should take measures.

13:33 Q3 showed a decline, Q4 seems similar, weak consumer and investor sentiment, lower global demand. This will extend into 2013.

13:34 Later, everything will be better: global demand, financial market stabilization and consumer confidence. Seeing stabilization, albeit in low levels.

13:35 Underlying price pressures should remain contained. Higher oil prices and administrative costs still weigh.

13:36 Growth driven by demand for liquid assets.

13:36 Inflow of capital into the euro area supported the situation. Loans to the private sector remained at -0.5% – net redemption in loans to non-financial corporations.

13:37 Improvement in recent months in credit. EUR/USD returns to 1.3115 after falling to 1.31.

13:38 Heightened credit risk: subdued credit growth reflects current stage of business cycle

13:39 the future SSM is a crucial move towards reintegrating the banking system

13:40 Questions begin.

13:41 The decision was unanimous. EUR/USD leaps higher to 1.3140.

13:42 Loan redemption are down, fragmentation is being gradually repaired. Bond yields are lower, stock markets are higher, ECB balance sheet is shrinking.

13:44 Still signs of significant fragmentation. No exit strategy planned now. Sees recovery later in 2013. Greater strength needed in the economy – not seen yet. No reason to think about exit.

13:45 Regaining of competitiveness and other government action is needed for long term improvement – not only financial market improvement.

13:46 EUR/USD already at 1.3160. Since the last assessment, there were signs of financial market stabilization – reason for unanimity.

13:48 New measures adopted for collateral monitoring.

13:50 Draghi says it was unanimous, and no request for a rate cut, but EUR/USD stops at resistance at 1.3180.

13:51 Economic situation remains weak.

13:53 Tail risks have been removed

13:54 There was a serious risk of a systemic risk in the euro-area in late 2011 – LTRO saved the situation.

13:55 1.31.80 broken.

13:56 “We’ve shown how to do it”

13:56 What about the Bundesbank? Why you never listen to those who were right in the past?

13:58 Draghi will “not comment on individual statement”. The principle of the single voice is essential.

14:01 We are now back in a normal situation from a financial viewpoint, but no strong recovery.

14:03 The risk is lack of action from governments: if they don’t implement it in a balanced way.

14:04 Not good to have permanent debtors and permanent creditors.

14:07 Repairing from the Lehman era hasn’t ended. Regulators have improved.

14:08 EUR/USD sliding a bit from high levels, but sticking around 1.3180.

14:09 Policies have significantly changed in the past years.

14:09 What about unemployment fragmentation, such as youth unemployment?

14:11 Youth unemployment is due to dual labor markets: too much protection for the old and not enough for the young.

14:12 Another reason for fragmentation is labor mobility. Output gaps would justify lower levels of inflation. Monetary policy cannot do much about that. We believe that price stability gives long term basis for job creation.

14:13 EUR/USD moves higher to 1.3190.

14:14 International consensus says that market determined exchange rates are needed, and that countries should refrain from competitive devaluation of currencies.

14:16 Euro is at its long term average – so, Draghi is not worried about the value of the euro.

14:18 EUR/USD eyees the next round number: 1.32.

14:20 Still many risks ahead, including from governments.

14:23 Analysis and chart: EUR/USD Powers Higher on Draghi’s Words

14:24 So much progress and so much sacrifice means that to revert to an untenable situation is a big mistake. Current policy has short term contractionary effects. No the time to go back.

14:26 Not good to be complacent – we need to keep moving forward.

14:27 The success is the composite outcome of everything. There is positive contagion when things improve.

14:28 Press conference ends. Draghi’s words “positive contagion” will be remembered.

Background

The economic situation in the euro-zone is deteriorating, with core countries slowing down. Also inflation is close to the 2% target. On the other hand, the debt crisis has significantly eased: the recent Spanish bond auction certainly showed this.

EUR/USD couldn’t break the triple top of 1.33 and dropped as low as 1.30, which served as an excellent cushion. For more specific lines and events, see the EURUSD forecast.

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Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.