Key Points:
- ECB’s Draghi takes a hawkish tone in his latest commentary.
- Highlights low inflation but suggests the economy is growing strongly.
- Potential for a QE taper in September ECB meeting.
The Euro Dollar has been on a significant bullish run over the past 24 hours as ECB Chair Mario Draghi stoked the fires of speculation with his latest commentary on the state of the Eurozone economy. Although there was plenty of mixed information for the average trader to digest, the unmistakable message was one of positivity which sent the Euro soaring.
So let’s start with the one negative factor within Draghi’s monetary policy statement, inflation. There is no doubt that persistent inflation has largely been absent from the Eurozone over the past decade. However, this is no different from most of the other Western nations and, in fact, EU inflation isn’t actually looking that bad with the latest statistics showing inflation running at around 1.3%. Subsequently, there is no doubt that inflation could potentially improve and this is effectively what the ECB Chair suggested when he stated that he expects it to pick up over the medium term.
In addition, unemployment and consumer sentiment is also strongly improving with the former having dipped to 9.3% recently. In fact, if you exclude the PIGS from the figures, the unemployment rate actually looks relatively good for the broader Eurozone. Also, wage growth is proving relatively supportive of consumer spending with wages have risen by over 1.4% q/q. Retail Spending and consumer confidence are subsequently also starting to pick up and the flow on effects are interesting indeed.
Subsequently, there has been plenty of upward momentum in the Euro Dollar and the currency pair has managed to smash through the 1.16 handle and currently trades around the 1.1628 mark. Infact, this marks the strongest level in over 23 months for the pair and could be a precursor of things to come.
However, much of the forward guidance provided by the ECB hinted at strongly building domestic pressures within the economy. Subsequently, the ECB might have actually teased the bulls somewhat with suggestions that they may look to “tweak” their QE levels in their September meeting. Considering the range of improving economic conditions, any tweaking would surely have to be a reduction or removal of some QE and asset purchases. Any move along these lines would prove to be a highly bullish one for the Euro Dollar.
Ultimately, we will all have to wait and see what September’s ECB meeting brings with it. However, the risks are all skewed to the upside and we are likely to see building bullish pressure in the EURUSD as we move towards the critical meeting. In fact, right now 1.1714 looks relatively achievable, as does the 1.18 handle. Subsequently, it is entirely conceivable that we might yet see the venerable Euro Dollar trading above 1.20 if the ECB continues to follow through and doesn’t seek to jawbone the market.
