Euro Hit by Draghi’s Dovishness not Jawboning

<p>Euro drops $1.5 cent after Draghi maintained a largely dovish tone, stating that growth risks remain on the downside and anticipating inflation to fall below […]</p>

Euro drops $1.5 cent after Draghi maintained a largely dovish tone, stating that growth risks remain on the downside and anticipating inflation to fall below its 2.0% in coming months.

Draghi’’s comments on the euro attributed its appreciation to “a sign of confidence in the euro”, while adding the central bank will monitor the currency for its assessment on price stability.

EURO HIT BY DRAGHI’s DOVISHNESS NOT JAWBONING

The clearest indication that the euro sell-off was caused by Draghi’’s dovishness rather than jawboning (concern with euro appreciation) is the resulting DECLINE in sovereign bond yields.

While the euro fell more than 1.0% from its pre-Draghi levels, peripheral bond yields are hardly changed due to the dovish delivery from the ECB president. In fact, the 10-year yields on Italy and Spain sovereign bonds fell by 5-7 basis points before edging back up once the intensified euro sell-off weighed on overall risk appetite —including the 0.6%-0.9% decline in US and European equities.

GOING FORWARD, if the appreciation in the euro exchange rate continues to rise to the extent of diverging from real interest rates, then the ECB may begin shedding light on FX valuations and their fundamental implications.

Euro’’s uptrend remains intact, with support underpinned at $1.3280, forming a channel from the July lows. We continue to expect a revisit of the $1.37 cycle high, before accumulating momentum towards $1.40 before end of Q1.

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