FX Market Summary 02-06-2014: Draghi Confounds Dovish Expectations

The Australian dollar rallied during the Asian session on Thursday, bolstered by a return to trade surplus and a solid reading for retail sales. AUD/USD rallied again with a peak close to 0.8980 as shorts continued to cover positions.

Narrow ranges inevitably dominated during the early European session with caution ahead of key monetary events later in the day and no fresh impetus from any data releases. EUR/USD consolidated above the 1.35 level and USD/JPY held above 101.0.

There were no surprises from the Bank of England as interest rates and  the amount of quantitative easing were both left on hold following the latest meeting. There was also no statement from the MPC with forward guidance left unchanged for now. Given speculation of a possible central bank shift, GBP/USD rallied slightly following the decision, moving back above 1.63 from 1.6280 lows.

Main attention then focussed on the ECB rate decision and the central bank left all rates on hold as had been expected by a large majority of investment houses. EUR/USD rallied immediately following the decision before drifting back to the 1.3500 area ahead of bank President Draghi’s press conference.

Markets were expecting a generally dovish tone from Draghi with potential hints over new policy initiatives and a possible ending of bond-purchase sterilisation. He was still generally very cautious over the outlook and reported that the meeting had been dominated by discussion of possible downside risks and contingencies. He also stated, however, that conditions were starting to some signs of improvement and that benchmark rates had already been cut in November.

Given expectations of a much more dovish slant, the Euro rallied sharply with a move to above the 1.36 level from lows near 1.3480 ahead of the press conference.

The ECB drama and sharp price action tended to over-shadow the latest US data releases. There was a decline in initial jobless clams in the latest week to 331,000 from a revised 351,000 previously which provided some dollar support while there was an increase in the December monthly trade deficit to US$38.7bn from US$34.6bn previously.

As far as the dollar is concerned, there was caution ahead of the pivotal monthly payroll data on Friday. There was a rebound in equity markets at the US open which curbed defensive yen demand and USD/JPY pushed to highs in the 102 area with strong gains for EUR/JPY.

Sterling struggled to gain any additional traction and the Canadian dollar also registered net losses on the day even though USD/CAD retreated from highs above 1.11 following a stronger than expected Canadian PMI release.

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