FX Market Summary 12-05-2013: Euro Defies Dovish ECB Talk

EUR/USD spiked higher during the Asian session on Thursday with a move above 1.3620 triggering stop-loss Euro buying to a peak near 1.3640 before dipping lower again. Trading conditions were then choppy and indecisive during the first half of the European session with a reluctance to take aggressive positions ahead of the crucial ECB policy meeting.

As expected, there were no changes in interest rates with the benchmark repo rate left on hold at 0.25%. President Draghi remained generally very cautious surrounding the economic outlook and there was also a downgrading inflation forecasts in the latest staff projections. The 2014 inflation forecast, for example, was cut to 1.1% from 1.3% with the rate expected to stay below 1.5% the following year.

The latest US economic data was stronger than expected with jobless claims falling to 298,000 in the latest week from 321,000 previously while the third-quarter GDP estimate was revised higher to 3.6% from 2.8%. EUR/USD dropped sharply to lows just below 1.3550 following the data and Draghi’s opening remarks.

The dollar was unable to gain any further traction following the data releases despite a comfortable beat on market expectations. Although Draghi was generally dovish and there were hints over a potential fresh, more targeted LTRO, there were no announcements of fresh measures in the press conference. Draghi also stayed clear of any significant reference to negative interest rates or the Euro’s value.

There was a decline in German bund prices following the ECB press conference with markets expecting more aggressive policy hints. Not for the first time over the past few months, markets were also caught out and badly positioned as EUR/USD failed to break any key support levels. There was a sharp round of short covering which initially pushed EUR/USD to the 1.3610 area with stop-loss buying then triggering a fresh surge to the 1.3665 area.

There were no major surprises in the UK government’s autumn statement with confirmation that GDP growth forecasts had been upgraded for the next two years ahead. Despite a slight downgrading of longer-term forecasts, there was still a reduction in forecast borrowing levels over the next two years and the overall Sterling impact was neutral as profit taking kicked in.

The Bank of England also left policy unchanged at the latest MPC meeting with little Sterling reaction as no statement was issued. GBP/USD was again unable to hold above the 1.64 level and retreated to lows around 1.6310. The pair was unable to gain fresh traction even when the dollar stumbled heavily as EUR/GBP rallied strongly to near 0.8370.

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