3 Reasons to Fade the Draghi Rally

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ECB president Mario Draghi triggered an impressive rally by saying that the ECB will do “everything in its mandate” to save the euro. These words were interpreted as a thick hint towards direct bond buying via the SMP program.

However, there are reasons to doubt that this is the case, and to label this rally as yet another short covering move before the next fall. Is it a short opportunity? We’ll know soon enough.

  1. Mandate: The ECB’s mandate is to ensure price stability. It already bought bonds through the SMP, but it set tough conditions. Buying too much would violate the EU treaty that forbids monetizing debt.
  2. Giving the ESM a banking license: What Draghi probably meant is to give the ESM bailout fund a banking license, enabling it to borrow money from the ECB. Another ECB member, Nowotny, already discussed this option. Enabling this mechanism requires another lengthy approval process.
  3. Market impression is limited: EUR/USD rose up to the 1.2330 line which capped it several times during July. It didn’t go further up. Spanish bonds fell to 7% – the bailout barrier. It didn’t go further.

The ECB is the only factor that has the tools to stop the debt crisis fast, by buying bonds en masse – an American / British QE move, something the ECB strictly rejects. Spain’s finance minister called for a “Fed-like” ECB, but this will not happen soon.

See more about the euro in the EUR/USD forecast.

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About Author

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 the 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.