The euro went for a ride on the ECB and Draghi yesterday
An apt depiction of euro traders yesterday:
Okay, all kidding aside. Let’s now get into the nitty-gritty of the ECB monetary policy decision yesterday and how that played out in the EUR/USD.
The initial statement from the central bank was rather dovish and it pretty much left little to the imagination after. In my view, the most surprising thing is that they decided to put in a mention of rate tiering and QE in the statement itself.
That basically took the sting out of any potential for Draghi to be extra dovish unless he decides to go into the details of tiering and QE – which he then admitted there was no clear consensus on and likely not even discussed (since a rate cut was not discussed either).
But it was his hesitant language (for some reason, he kept going back to his speech in Sintra) that helped to give euro buyers some temporary relief before markets started turning back towards a stimulus package being introduced in September.
EUR/USD made fresh two-year lows of 1.1102 but buyers defended the barrier at 1.1100 and Draghi’s uncharacteristic “performance” helped see price then move to a high of 1.1188 before settling lower below the 100-hour MA (red line).
That means sellers are in near-term control still with the focus now moving away from the ECB and over to the Fed instead.
As mentioned yesterday, should the ECB not initiate any stimulus measures this week then they would have to step up their game rather drastically in September. As it stands, there isn’t a clear view as to whether or not they can manage that.
Some policymakers are a bit doubtful about the effectiveness of tiering and QE. That could mean we may see a more limited rate cut but then again Draghi said that any rate cut will be paired with tiering to mitigate risks to financial institutions.
As for QE, there weren’t much details for markets to digest but in my view, it’s not necessarily a given in September and this is a divisive topic among traders at the moment.
I’m sure we’ll get more clues from “ECB sources” over the next few weeks so let’s wait and see what that entails for the central bank’s decision in September.
Otherwise, pay attention to more economic data to see how desperate the ECB will have to dig deep into their stimulus toolkit. But for now, let’s prepare for the dollar side of the equation in EUR/USD first with US Q2 GDP data in focus later today.
For EUR/USD, topside risk is defined by the 100-hour MA and overnight highs at 1.1167 and 1.1188 respectively. As for a downside move, the risk for buyers is if sellers manage to breach the barrier at 1.1100.