Trading conditions in early Europe on Thursday were inevitably lacklustre as players waited for the crucial ECB council decision. Risk appetite held generally firm with the yen still generally on the defensive, although with a reluctance to push the yen sharply weaker given underlying fears surrounding the Chinese outlook.
The UK PMI services-sector index was slightly weaker than expected with a decline to 57.6 for March from 58.2. Although the rate of decline has been slow, the index retreated to a nine-month low which tended to have a measured negative impact on Sterling on speculation that growth was no longer accelerating. The data also tended to offset the impact of comments from Bank of England Governor Carney who stated that an increase in interest rates ahead of the May 2015 election could not be ruled out and GBP/USD dipped to test support below 1.6600.
The ECB left interest rates on hold following the latest policy meeting with the main repo rate unchanged at 0.25%. There had been a very small minority of analysts expecting a rate cut and the unchanged decision triggered a rally in the Euro with EUR/USD moving to the 1.3770 area from 1.3750.
The initial US releases of the session were overshadowed by Euro-zone events with jobless claims increasing to 326,000 in the latest week from 310,000 previously. The latest trade account data was also weaker than expected with a February deficit of US$42.3bn from US$39.3bn.
Attention then inevitably focussed on ECB President Draghi’s press conference. Opening remarks were extremely similar to the remarks at the start of March’s conference and the EUR/USD initially rallied to the 1.38 area. Subsequent commentary had a more dovish tone with remarks that his biggest fear was protracted stagnation longer than in the bank’s baseline scenario. Draghi also commented that negative deposit rates and quantitative easing had been discussed at the meeting.
The net result was an increase in expectations that the ECB was both more concerned over the deflationary risks and prepared to take action if necessary over the next few months which pushed the Euro weaker. EUR/USD retreated to test the key 1.3700 support area during the US session.
The US ISM non-manufacturing data was slightly below expectations at 53.1 for March from 51.6 previously which did not provide additional ammunition for dollar bulls. USD/JPY initially pushed to a high around 104.10 without being able to make a convincing break above the former resistance area and dipped back below 104 following significant selling on the EUR/JPY cross.