FX Market Summary 03-06-2014: Euro Surge On ECB Status Quo

Ranges were very narrow ahead of the US open on Thursday with a high degree of caution ahead of key event risk surrounding the ECB policy meeting.

As expected by a large majority of analysts, the ECB left interest rates on hold at the latest policy meeting with the benchmark repo rate unchanged at 0.25%. There has been some speculation over a cut at this meeting and the decision pushed the Euro higher with a move to near 1.3770 before fading back to the 1.3750 area.

Although the US jobless claims was better than expected with a decline to 323,000 in the latest reporting week from 349,000, the dollar was unable to secure any traction ahead of the payrolls data Friday as Euro-zone developments dominated.

There had been greater speculation that alternative ECB measures such as the ending of SMP bond-purchases sterilisation would be sanctioned at this meeting. In this context bank President Draghi’s news conference was inevitably a very important focus.

In the event, there were no fresh measures by the central bank with Draghi’s statements virtually identical to last month. There was a slightly more optimistic tone on the economic outlook with comments that developments since the last meeting have been positive. As far as the Euro’s level is concerned, Draghi again rejected the notion of exchange-rate targeting as an instrument of monetary policy. There were references to the fact that a strong currency would have an effect on inflation which would have an indirect policy impact.

Markets inevitably focussed on the lack of fresh policy measures and less dovish than expected rhetoric. This combination pushed the Euro sharply higher with EUR/USD moving to a peak in the 1.3850 area with players eying key long-term downward trend-line resistance in the 1.3890 area.

Risk appetite was generally more robust and USD/JPY pushed to highs above 103 as EUR/JPY advanced strongly to a peak above 142.70 while EUR/CHF moved back above the 1.22 level.

There were no surprises from the Bank of England with benchmark interest rates held at 0.50% and no change to the quantitative easing targets. Sterling did spike higher following the decision with a peak at 1.6750 where strong resistance continued to hold and there was a quick retreat back to the 1.6700 area with Euro moves then dominating as EUR/GBP pushed to highs above 0.8280.

The Australian dollar strengthened with support from stronger than expected retail sales data and a second successive trade surplus. AUD/USD also secured further momentum after a break above the key 0.9000 resistance zone. Stronger Canadian data helped push USD/CAD to lows near 1.0950.

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