Here’s Why Euro Was Dumped After ECB Press Conference…


ECB decided today to move its main refinancing rate at a historical low level and explained the central banks action in the ECB Press Conference that followed, here are some highlights:

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(EU) ECB Chief Draghi (Prepared Speech):

  • Economic growth in the euro zone remains weak, heightened uncertainty is weighing on confidence.
  • Inflation pressure over the policy horizon has been dampened further 
  • ECB retains its full ability to maintain price stability by acting in a firm and timely manner.
  • Q2 euro zone GDP showed continued economic weakening, euro zone economy will recover gradually.
  • Credit conditions, balance sheet adjustments, debt crisis and high unemployment will weigh on growth momentum. Other downside risks include possible energy price increases over the medium term.
  • Inflation will likely fall further in 2012, reiterates that inflation to fall below 2% target in early 2013.
  • Reiterates that inflation risks are broadly balanced, and underlying pace of monetary expansion remains subdued. Short-term monetary developments are displaying volatility.
  • Economic and monetary union needs to be put on a more solid footing for the future. welcomes EU Summit decision to develop a single fiscal supervisory authority.
  • ECB is prepared to serve as an agent in EFSF/ESM market operations.

(EU) ECB Chief Draghi (Q&A):

  • Inflation could fall below the 2% target in 2012; not seeing any signs of deflation in the euro zone
  • The idea that the ECB could channel funds to a specific category of banks or a specific sector is wrong.
  • Reiterates that ECB must not engage in monetary financing. Recent broadening of collateral requirements was to attract a wider selection of financial firms.
  • Collateral framework will have to be revisited, but not any time soon.
  • ECB banking supervision must be rigorously separated from monetary policy tasks, ECB must remain independent in carrying out banking supervision.
  • Oversight of banks by the ECB will be carried out in very close coordination with national central banks.
  • Right now the size of the ESM/EFSF is adequate to cope with the risks to the euro zone.
  • ECB can only act within the boundaries of its mandates, nothing can be gained by asking it to act outside of its mandate.
  • Ireland has made extraordinary efforts, program on track.- Financial environment has become a little bit less tense than a month ago.
  • Decision today was unanimous on all points and carries special strength
  • Crisis today is not as bad as the crisis in 2008-09. Downside scenarios to the ECB’s scenario are materializing.
  • Sees no risks to the inflation outlook from either side, giving the ECB scope to act today.
  • There was no discussion of any other non-standard measures at today’s meeting. Negative deposit rate not discussed
  • ECB needs to have to have nonstandard measures that are effective, it is not obvious that there are nonstandard measure can be effective in a fragmented euro area
  • Doesn’t see a dramatic change in bank behavior on deposit rate cut
  • ECB is not running low on policy options, still have artillery ready to contain inflation risks.

Here are some analysts’ sentiments:

ECB’s moves were seen by markets as highly inadequate: just one month ago, Draghi himself said that cutting rates did little good because the monetary transmission mechanism was broken. Some were hoping for bolder ECB policy moves to help ease the euro zone crisis, however Draghi offered no new concessions, drawing accusations from some analysts that the positive momentum generated by the recent EU Summit was being diluted by ECB’s inaction.

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Many analysts blamed the sell-off on the absence of supportive extra ECB policy moves (no LTRO, no further peripheral bond concessions) rather than the rate cut. One analyst said that the ECB has simply added back the risk premium that the EU summit sliced off last week…

How to interpret these headlines?

It obviously doesn’t take a genius to see that the market is disappointed over ECB’s rate decision today.  But the bulk of the move came in ahead of the ECB Press Conference at 8:30am, where  EURUSD was hovering around the 1.2400 after the sharp drop from the 1.2520 level… and of course, once the press conference started, EURUSD dropped another 40 pips.  This leads me to believe that market made up its mind BEFORE the press conference due to NO new easing or liquidity programs were announced, along with the Zero-Interest Rate on the Deposit Facility, which probably hit a chord with perpetual Euro sellers.  Remember ECB is responsible for 3 rates, the Marginal Lending, Deposit, and Main Refinance Rate, with the Main Refi falling to the historical low of 0.75% and Deposit at 0.0%, this latest episode from ECB is not inspiring any confidence.

I believe the market was confused over the relatively lack of action from ECB which contributed to the sharp sell-off in the Euro…  However, I believe EURUSD will probably remain resilient at the current level, hovering around the 1.2400, until the next wave of news catalysts hits the wire…  In the meantime, I would be keeping my options open for a potential EURUSD comeback if tomorrow’s NFP comes out disappointing; or get ready to dump Euro on a much better than expected NFP release as USD offers a better fundamental outlook and less uncertainty in comparison (at least for now).

 

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About Henry Liu

My name is Henry Liu and I am a Forex Trader and Mentor. I help traders achieve consistent income trading Forex while spending less time trading. My focus in trading is a combination of Fundamental Analysis, Technical Analysis, and Market Sentiment. Far too many retail Forex traders concentrate on just one aspect of trading, technical analysis, and ignore everything else; it is my goal (and vision) to educate every trader on how to take advantage of news trading and become more balanced traders.

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Comments

  1. siddique says:

    I want to trade EURCHF with large volume,, after news.
    i mark that from last 2 month EURCHF move around 1.200 and after any news related to EUR. its be volatile and with in 1 – 2 hours its touch again 1.2000 thats means its safe for news trading..
    plz ans me henry because i will start trading after your reply.
    thenx

    • CHF is highly manipulated by the SNB therefore I’d recommend to stay out. If SNB stops to intervene, then EURCHF could drop sharply below the 1.2000 level. At the time SNB (Swiss National Bank) seems to reiterate that it will continue to intervene, so you are safe to BUY from the 1.2000, but with what’s going on in Europe, you are looking at a very low profit potential, maybe 5 to 10 pips trading range. If you want to invest for a long time, 3 to 6 months, then this could work out as EUropean Crisis could ease in 6 months.

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