FX Market Summary 05-08-2014: Draghi Comments Unsettle Euro

The Australian dollar was a significant mover during the Asian session on Thursday with a strong rally from support levels. Domestically, there was a stronger than expected labour-market report with employment increasing by over 14,000 for the month as the unemployment rate held steady. There was also a slightly better than expected set of Chinese trade data which helped underpin risk conditions and Australian export hopes.  AUD/USD bolstered by the ability to hold the 0.93 area pushed higher to a peak just below 0.94.

European developments were then broadly subdued ahead of key interest rte decisions from the two largest central banks later in the session as EUR/USD continued to find support on dips towards the 1.3900 level.

There were no surprises from the Bank of England with interest rates left on hold at 0.50% while quantitative easing was also left unchanged. Sterling edged slightly lower as there was also no statement from Carney, although movement was limited.

The ECB also left the main refinance interest rate on hold at 0.25% following the latest council meeting. EUR/USD initially moved higher following the decision and tested 2014 highs without being able to break higher as caution prevailed ahead of Draghi’s press conference.

The ECB President continued to express optimism surrounding recent economic developments within the Euro-zone. Although he expected inflation to rise gradually, he was not satisfied with the current rate. In a key passage, Draghi stated that the council would be comfortable with taking action at the June meeting, but would want to see the staff projections first. Markets took this as a strong hint that there would be at least a limited rate cut in June. Having briefly spiked higher, the Euro came under sustained selling pressure as EUR/USD initially declined to the 1.3900 area.

The Euro also came under heavy selling pressure on the crosses, especially against Sterling with a sharp intra-day reversal and decline through the key 0.8200 support area triggering lows at 0.8170. EUR/JPY also dipped sharply to lows near 141.00.

The dollar gained some fresh impetus from Fed Chair Yellen’s comments that fiscal drag on the economy would ease this year and this helped trigger another leg down for EUR/USD with a slide to the 1.3850 area.

USD/JPY was unable to keep pace, but there were marginal gains to the 101.90 area as US equity markets proved resilient in New York. GBP/USD also found solid support on any dips and managed to regain the 1.6950 level despite the generally firm dollar tone.

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